Equity Compensation Plans & Design Flashcards

Under Section 409A of the Internal Revenue Code, a stock option is generally exempt from deferred compensation rules if it is granted:

Answer: With an exercise price at least equal to fair market value on the grant date

Options granted at or above FMV on the date of grant satisfy the Section 409A exemption, avoiding the 20% excise tax and interest penalties on discounted options.

A 'clawback' provision in an equity plan most commonly allows a company to:

Answer: Recover previously paid compensation if an employee engages in misconduct or a restatement occurs

Clawback provisions—required under Dodd-Frank Rule 10D-1 for listed companies—mandate recovery of erroneously awarded incentive compensation following a financial restatement.

Which of the following is a key distinction between a stock appreciation right (SAR) and a stock option?

Answer: SARs pay out the spread without requiring the holder to pay an exercise price

A SAR grants the holder the gain (spread between grant price and current FMV) without requiring cash outlay to exercise, and may be settled in stock or cash.

A company's equity plan requires shareholder approval to reprice outstanding stock options. Which of the following transactions would be considered a repricing?

Answer: Canceling underwater options and reissuing new options at a lower exercise price

Canceling and reissuing options at a lower strike price is the classic form of repricing and requires shareholder approval under most NYSE/Nasdaq listing standards.

For purposes of IRC Section 422, what is the annual limit on the value of ISOs that can first become exercisable in any calendar year for a single employee?

Answer: $100,000

The $100,000 ISO limit (based on grant-date FMV) governs how much vesting value can qualify as ISO in any single calendar year; excess vests as NQSOs.

A performance share unit (PSU) plan uses a relative TSR metric measured against a peer group. The plan pays out 150% of target if TSR ranks at the 75th percentile. This design feature is best described as a:

Answer: Leveraged payout with upside opportunity

Paying above 100% of target for above-median relative performance creates a leveraged, upside payout opportunity designed to reward exceptional relative results.

Which equity plan design element is most scrutinized by institutional shareholders as a measure of potential stockholder dilution?

Answer: The overhang percentage (shares outstanding plus available under plan divided by total shares)

Overhang represents the total potential dilutive impact of all outstanding and available equity awards, and institutional investors closely monitor it relative to industry benchmarks.