Equity compensation and talent retention

 

EQUITY COMPENSATION: WHAT IS IT ABOUT?

Concept : form of variable remuneration that seeks to reward employees and{colaboradores} based on and in accordance with the {variation} of the company’s valuation .

Purpose : to align interests and incentives of employees/collaborators, company and shareholders.

Equity Compensation Plan: plan formally approved by the company to implement the compensation of executives, key employees, consultants and advisors for shares or options to purchase shares of the company. It determines the species of grants that may be granted, their basic rules and conditions.

Grant or Award : right, or asset, granted as a form of equity compensation. Are the possible species within a equity compensation plan (eg stock option , restricted stock and others)

Vesting : any and all requirements necessary to exercise the right or fruition of the asset received. Vesting is not just about time !!

Full-value award : Award that consists of the good itself, and therefore reflects the full value of the good received (Ex: stock bonus, restricted stock)

Not full-value award : Award that consists of the right to acquire or enjoy the good, and therefore reflects the value of the appreciation of the good received (Ex: stock option , SAR).

In addition to “stock options” , there are other types of stock compensation in the US and Brazil – with some adaptations of course – such as Stock Bonus , Phantom Stock and Restricted Stock Units .

BONUS STOCK

  • Beneficiaries: Employees only
  • Shareholder Rights: Same as class
  • Restrictions and related rights
  • salary nature
  • How to pay tribute? Cash bonus, loan, liquidity.
 

PHANTOM STOCK

Beneficiaries: Employees, executives, contracted third parties (PJ, self-employed) or any other beneficiary.
Benefit: right to a “phantom”/”virtual” share that entitles you to the value of that share (money) on a certain date or future event.
Various vesting criteria
Shareholder Rights: No voting rights. You can receive “virtual” dividends.
“Rescue” price: market price of the shares, appraised value a fair market equivalent value determined by the board, recent runds of investor financing or book value.
It normally does not incur any cost to the beneficiary.

What are Stock Options?

Concept: type of variable pay that seeks to compensate employees {and associates} based on and according to the company’s valuation {variation}.

Purpose: align interests and incentives of employees/associates, company and shareholders.

Equity Compensation Plan: plan formally approved by the company for the implementation of the compensation of executives, key employees, consultants and advisors with shares or company stock option. Establishes the types of grants that may be awarded, their rules and basic conditions.

Grant or Award: right or asset granted as equity compensation. These are the types possible within an equity compensation plan (ex: stock option, restricted stock and others)

Vesting: each and every requirement needed for the exercise of the right or fruition of the asset received. Vesting is not only time!!

Full-value award: Award consisting of the property itself, and, therefore, reflects the full value of the property received (Ex: stock bonus, restricted stock)

Not full-value award: Award consisting of the right to purchase or enjoy the property, and, therefore, reflects the appraised value of the property received (Ex: stock option, SAR).

In addition to the “stock options”, there are in the USA and in Brazil – with a few adjustments, of course – other types of stock compensations, such as Stock Bonus, Phantom Stock and Restricted Stock Units.

 

STOCK BONUS

Beneficiaries: Only employees

Rights of Shareholders: The same for the class

Related restrictions and rights

Salary nature

How to afford the tax? Bonus in cash, loan, liquidity.

 

Phantom Stock

Beneficiaries: Employees, executives, contracted third parties (legal entities, independent contractors) or any other beneficiary.

Benefit: right to a “phantom”/”virtual” stock that grants the right to the stock value (cash) on a specific date or future event.

Various vesting criteria

Rights of Shareholder: Without voting right. May receive “virtual” dividends.

“Redemption” price: stocks market price, appraised value at fair market equivalent value determined by the board, recent rounds of investor financing or book value.

Usually brings no cost to the beneficiary.

What are Stock Options?

Stock Options is the most common form of compensation of associates with equity interest in Brazil. But there are other ways for companies to achieve the purpose of aligning their interests with that of their associates. Both in Brazil and in the United States, different mechanisms of compensation in stocks are being developed.

Stock Options

Stock option for a fixed price and with a fixed time limit if certain conditions are met.

In short, in Brazil, we have two types of stock options: those of compensatory nature and those of non-compensatory nature. Such distinction was established based on CARF’s court precedents and cases which companies feel 100% safe that their SOP plan will have a non-compensatory nature are very rare. The effect of that is the moment of taxation of the compensation: grant (compensatory) x exercise (non-compensatory). The assignment of one type or another takes into account different aspects of the plan, such as the price, share restrictions and the risk involved in the stock option grant contract.

In the United States, the scenario is much clearer. American jurisdiction brings two types well defined by tax law: the Incentive stock options (ISOs) or nonqualified or nonstatutory stock options (NSOs). In the NSOs, the tax effect takes place in the moment of the exercise, even if there is no liquidity event, while the ISOs allow for the deferral and payment of tax rate on capital gain at the time of liquidity and not “ordinary income”. There are several criteria for a Stock Option grant to be characterized as ISO.

There is also the Restricted Stock Unit (RSU), which is a type of compensation made by the company to be associate in the form of company stocks. RSUs are delivered after the associate reaches performance goals established by the company or work for the company for a certain period. These stocks seek to attract the associates’ interest, but have no tangible value until the stock acquisition period is complete. It is worth emphasizing that they receive a fair market value when acquired.

When choosing the type of compensation in stocks, the company must consider its corporate effects, the political and economic rights that will be granted to the future shareholder, the dilution that granting such stocks will cause to founding shareholders and the tax effects for the company and for the beneficiary. If it is an option, there must be purchase/cash disbursement by the beneficiary. Using the right compensation mechanism is very important for the mitigation of tax risk and future conflict with the beneficiary.

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