PLANSPONSOR - November/December 2017 - 56

TOTAL BENEFITS
to purchase equity in their company at a
discount to fair market value. It provides
an incentive to employees by allowing
them to participate in their company's
growth while providing the firm with
some liquidity.
Restricted stock award. This type of
award also includes shares of company
stock, but, unlike stock options, restricted
stock awards are granted at zero dollars.
The employee's rights to the stock are
restricted until the shares vest, similar
to a stock option. Vesting periods can be
met by a contractual time period or by
company or individual performance.
Restricted stock unit. Allan Golotko,
head of corporate equity solutions product
management at Morgan Stanley in New
York City, notes that a restricted stock
unit (RSU) " correlates with or is valued
in terms of company stock, but stock is
not issued at the time of the grant. " This
option differs from traditional restricted
stock in being a promise by the employer
to pay an executive with stock shares or
cash value upon his vesting date. RSUs
operate similarly to a restricted stock
when the vest occurs. Upon the employee's
vesting, the company will issue
company stock equal to the RSU's value.
Performance award. A variation of a
restricted stock award is a performance
award. These have specific performance
hurdles that a company, or a division
within a company, needs to meet in
order for executives to receive the award's
value. According to Golotko, some
common marketplace benchmarks are
earnings per share (EPS) or total shareholder
return (TSR). Internal benchmarks
might include earnings before
interest, taxes and amortization (EBITA),
focusing on efficiency and profitability.
Stock appreciation rights (SARs).
This program entitles employees to
receive cash or stock in an amount equal
to the excess of the fair value of the
company's equity on the date of exercise
over the exercise price, which is typically
equal to the fair value of the company's
equity on the date of the grant. It
provides employees with the same financial
gain as would a comparable stock
option, without requiring a cash outlay
upon exercise. This provides an incentive
to employees and serves to retain them.
If settled in cash, SARs will not give up
any control of the company.
Phantom stock plan. This plan entitles
employees to receive cash or stock in
an amount equal to the value of an equivalent
number of shares of company stock,
or the appreciation in value of an equivalent
number of shares of stock since the
date the units were awarded upon the
occurrence of one or more predetermined
events-e.g., a change in control of the
company or the participant's retirement
at or after age 65. They are similar to
SARs, but realization of value is tied to
the occurrence of an event rather than the
employee's unilateral election.
The Benefits of Ownership
Data provided by Meghan Murphy,
director of thought leadership at Fidelity,
in Boston, show that employees strongly
favor the opportunity to purchase
employer equity through a structure
known as an employee stock purchase
plan (ESPP). Because stock purchased
through an ESPP is held outside of an
employee's retirement account-generally
stock will be purchased with aftertax
dollars but with a discounted share
price-invested dollars are accessible
prior to retirement and can be used to
KEY POINTS
* Stock ownership plans for employees can be created and delivered in
a variety of ways, depending on the needs of a given employer and
employee population.
* Employees may buy stock directly, receive it as a bonus, receive stock
options, or obtain stock through a profit-sharing plan.
* By owning part of their employer, employees are not only more
financially secure, but they may be inspired to work even harder.
* Companies hold employee shares, and the employee is gradually
vested into ownership. Benefits are available once a vested employee
leaves the company.
56 PLANSPONSOR.com November-December 2017
help address a variety of short-term
financial needs.
" Employees say they use company
stock acquired through their ESPP to
help pay down debt, add to their retirement
savings, finance real estate or
home improvement projects, or simply
set [it] aside for a rainy day, " Murphy
reports. " Employees who participate in
their company's ESPP are three times
more likely to sell company stock for
emergency cash, rather than take a loan
from their 401(k), and more than half
said it was 'highly unlikely' they would
tap their 401(k) if they needed cash. "
Murphy adds that employers can
also see specific benefits associated
with the ESPP approach, compared with
others, particularly if the goal is to have
simplified and efficient administration.
" Many employers have been working
to simplify the administration of their
retirement plans, and some that were
maintaining multiple retirement plans
[from perhaps mergers/acquisitions]
have worked to consolidate [them], so
now they need to offer only a singlecompany
stock fund, " she says. " In addition,
other employers have reduced or
removed company stock offerings from
their Employee Retirement Income
Security Act [ERISA] plans to lower fiduciary
risk and, in some cases, are giving
their employees an alternate opportunity
to purchase discounted company stock
via an ESPP. " -John Manganaro
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PLANSPONSOR - November/December 2017

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