Stock-Based Compensation

Extracted Attributes

• Valuation Method

  Fair value as of the grant date

• Alternative Names

  Employee Stock Options (ESO), ESOPs, Share-Based Compensation

• Common Instruments

  Restricted Stock Units (RSUs), Stock Options, Stock Appreciation Rights (SARs), Restricted Stock Awards (RSA)

• Taxation (Options)

  Generally taxed when exercised

• Regulatory Standard

  ASC 718 (Compensation—Stock Compensation)

• Taxation (Restricted Stock)

  Generally taxed when vested, unless a Section 83(b) election is filed

Timeline

• Warren Buffett criticizes mindless imitation in executive compensation practices in his Letter to Shareholders. (Source: Web Search (Morgan Stanley))

  1989-01-01

• Publication of 'Employee Sentiment and Stock Option Compensation' in the Journal of Financial Economics. (Source: Web Search (Morgan Stanley))

  2007-06-01

• Publication of 'Effective Tax Rates and Stock-Based Compensation' by The Footnotes Analyst. (Source: Web Search (Morgan Stanley))

  2022-05-03

• PwC updates its accounting guide for Stock-based compensation under ASC 718. (Source: Web Search (PwC))

  2023-09-01

• Scheduled update for PwC's Chapter 10 regarding stock-based compensation plan design considerations. (Source: Web Search (PwC))

  2025-03-01

Employee stock option

Employee stock options (ESO or ESOPs) is a label that refers to compensation contracts between an employer and an employee that carries some characteristics of financial options. Employee stock options are commonly viewed as an internal agreement providing the possibility to participate in the share capital of a company, granted by the company to an employee as part of the employee's remuneration package. Regulators and economists have since specified that ESOs are compensation contracts. These nonstandard contracts exist between an employee and employer, under which the employer is obligated to deliver a specified number of shares if the employee chooses to exercise their stock options. The contract length varies, and often carries terms that may change depending on the employer and the current employment status of the employee. In the United States, the terms are detailed within an employer's "Stock Option Agreement for Incentive Equity Plan". Essentially, this is an agreement which grants the employee eligibility to purchase a limited amount of stock at a predetermined price. The resulting shares that are granted are typically restricted stock. There is no obligation for the employee to exercise the option, in which case the option will lapse. AICPA's Financial Reporting Alert describes these contracts as amounting to a "short" position in the employer's equity, unless the contract is tied to some other attribute of the employer's balance sheet. To the extent the employer's position can be modeled as a type of option, it is most often modeled as a "short position in a call". From the employee's point of view, the compensation contract provides a conditional right to buy the equity of the employer and when modeled as an option, the employee's perspective is that of a "long position in a call option".

Web Search Results

• The Ultimate Guide to Accounting for Stock-Based Comp - Numeric

  Stock-based compensation is when companies reward employees with awards in the form of stock, stock options, or restricted stock units instead of cash, often tied to a particular vesting timeline or conditions. In practice, stock-based comp is one way to increase the total amount of compensation for an employee without upping the cash flow compensation cost, but instead giving employees ownership in the company. [...] Stock-based comp expenses are recognized over the requisite service period. For awards with service-based vesting conditions, this is generally straightforward. Ex. A stock option that vests over 4 years, should be spread out over those years and not recorded as a lump sum expense. Stock-based comp value is measured by the fair value as of the grant date. ‍ [...] Much of the complication exists because — 1) Companies provide stock-based comp in a variety of ways (restricted stock, stock options, employee stock ownership plans, long-term incentive plans, stock appreciation rights, employee stock purchase plans, etc.) and with different time-, performance- and market-based vesting conditions.

• [PDF] Stock-based compensation | Viewpoint - PwC

  .................................................... 11-8 Chapter 1: Stock-based compensation overview and scope—updated September 2023 Stock-based compensation overview and scope 1-2 1.1 Stock-based compensation background The guidance in ASC 718, Compensation—Stock Compensation, applies to various types of equity-based awards that companies use to compensate their employees (see SC 1.5 regarding terminology used in this guide). Under ASC 718, companies recognize the fair value of those awards [...] based, even in part, on the price of the company’s stock or other equity instruments. For example, an employee may be entitled to a cash payment if the company’s stock price reaches a specified target price or total shareholder return at the end of five years. Cash-settled LTIPs that have payout triggers linked only to employee service (i.e., time-based vesting) or internal performance conditions (e.g., Stock-based compensation overview and scope 1-4 sales or EBITDA targets) are not within the [...] Chapter 10: Stock-based compensation plan design considerations —updated March 2025 10.1 Stock-based compensation plan design overview ............................................................... 10-2 10.2 The executive compensation environment .......................................................................... 10-2 10.3 The role of stock awards in compensation plan design ....................................................... 10-5 10.4 Plan design process: An expanded set of

• [PDF] Stock-Based Compensation - Morgan Stanley

  “Employee Sentiment and Stock Option Compensation,” Journal of Financial Economics, Vol. 84, No. 3, June 2007, 667-712. 33 Steven Clifford, “How Companies Actually Decide What to Pay CEOs,” The Atlantic, June 14, 2017; Michael Faulkender and Jun Yang, “Inside the Black Box: The Role and Composition of Compensation Peer Groups,” Journal of Financial Economics, Vol. 96, No. 2, May 2010, 257-270; and Michael Faulkender and Jun Yang, “Is Disclosure an Effective Cleansing Mechanism? The Dynamics of [...] “Effective Tax Rates and Stock-Based Compensation,” The Footnotes Analyst, May 3, 2022. 31 Warren E. Buffett, “Letter to Shareholders,” Berkshire Hathaway Annual Report, 1989. This says that executives will “mindlessly” imitate one another in practices such as compensation and that junior people within a firm will be quick to come up with business justifications to support whatever the CEO wants to do. See www.berkshirehathaway.com/letters/1989.html. 32 Nittai K. Bergman and Dirk Jenter, [...] SBC companies use, even within the same industry. The benefits of SBC are generally accepted but the academic research on their veracity is equivocal. Returns for stocks make assessing the effectiveness of SBC difficult. When stocks go up, employees and ongoing shareholders are happy. No one is pleased when stocks go down. The main issue is whether the company accelerates its SBC grants. That indicates that SBC is more a means to pay employees than to align them with shareholders. Most

• 5.8 Share-Based Compensation | DART

  entity may be required to record a cheap-stock charge. Since share-based payments are often a compensation tool to attract and retain employees and nonemployees, a cheap-stock charge could be material and, in some cases, lead to a restatement of the financial statements. [...] To provide liquidity or for other reasons, entities may sometimes repurchase vested common stock from their share-based payment award grantees. In some cases, the price paid for the shares exceeds their fair value at the time of the transaction, and the excess would generally be recognized as additional compensation cost in accordance with ASC 718-20-35-7. In addition, an entity’s practice of repurchasing shares, or an arrangement that permits repurchase, could affect the classification of [...] Because a nonpublic entity’s common stock is not publicly traded, share-based payment awards often include repurchase features related to the underlying stock to provide grantees with liquidity and to limit the number of holders of stock before an IPO. These features typically are in the form of a (1) call right, in which a nonpublic entity has the right (but not the obligation) to repurchase stock from a grantee for cash, or (2) put right, which gives the grantee the right to require the

• Tax Considerations for Equity-Based Compensation

  The tax treatment of equity-based compensation depends on the award type. In theory, stock options are generally taxed when exercised, while restricted stock is taxed when vested. In practice, however, there are common structures which may help recipients reduce tax exposure on these incentive grants. ## Incentive stock options [...] In addition to tax considerations, private companies must accurately account for equity-based compensation in their GAAP basis financial statements. [...] the stock underlying the RSA has a low value on the grant date, such as stock in an early-stage start-up or a junior class of stock. Employees can take advantage of this election by filing a written statement with the IRS and their employer within 30 days of the grant.