Equity Compensation Plans & Design Flashcards

A 'share recycling' provision that permits shares withheld to cover tax obligations on RSU vesting to be returned to the plan reserve is permissible under:

Answer: Liberal share counting provisions explicitly included in the plan document

Liberal share counting (or net counting) provisions written into the plan allow shares withheld for taxes on full-value awards to be returned to the reserve, but most major exchanges prohibit this for option exercises.

Under ASC 718, which of the following is a required input for calculating the grant-date fair value of a stock option using the Black-Scholes model?

Answer: The expected dividend yield on the company's stock

Black-Scholes requires five inputs: stock price, exercise price, risk-free rate, expected volatility, and expected dividend yield; dividends reduce option value because they reduce the stock price on ex-dividend dates.

A company wants to grant equity to non-employee directors as part of their annual retainer. Which award type is most commonly used and avoids ISO eligibility restrictions?

Answer: Non-Qualified Stock Options (NQSOs) or RSUs

NQSOs and RSUs are the standard vehicles for non-employee directors because they have no employee-only eligibility restriction and provide straightforward accounting and tax treatment.

Which of the following award structures is MOST likely to trigger liability (mark-to-market) accounting under ASC 718?

Answer: Cash-settled SARs where the company has an obligation to pay cash upon exercise

Cash-settled SARs are liability-classified under ASC 718 because the company must remeasure the award at each reporting date until settlement, causing earnings volatility.

A 'plan evergreen provision' automatically increases the plan's share reserve each year by a fixed percentage of shares outstanding. What is the primary institutional investor concern with this feature?

Answer: It bypasses the shareholder approval process for additional share authorization, reducing governance oversight

Institutional shareholders and proxy advisors (ISS, Glass Lewis) typically oppose evergreen provisions because new shares are added without a recurring shareholder vote, weakening their oversight of potential dilution.

For a performance award plan to avoid Section 162(m) limitations under pre-2018 law, the performance goals had to be established:

Answer: Within 90 days of the performance period start, while the outcome was still substantially uncertain

Under the pre-TCJA Section 162(m) qualified performance-based compensation exception, goals had to be set within the first 90 days (25% of a 12-month period) while outcome was substantially uncertain.

A company's equity plan states that unvested awards will 'vest in full upon an involuntary termination without cause within 12 months following a change in control.' This is an example of:

Answer: Double-trigger acceleration

Double-trigger acceleration requires two events: (1) a change in control and (2) an involuntary termination without cause, before vesting accelerates.