As Options Fade – Stock Gains Restricted in Popularity

As publicly traded companies move away from stock options as a way to reward and motivate their employees, there is a growing trend to issue “restricted stock” as an alternative compensation option.

Unlike options that give employees the opportunity to buy a company, restricted shares are directly owned from day one. However, due to various limitations placed on this type of action, it is considered restricted in nature.

These restrictions generally begin with a vesting period that determines when the shares can be sold. The period of acquisition of rights can be determined by a period of time or by certain objectives that must be met. A typical period of time could be 4 years of employment with the company before you can sell your shares. If you leave before the consolidation, you will lose the restricted shares. In concept, this is no different than the consolidation and forfeiture components of qualified pension plans.

When the concession is set for a goal, a period of time may be irrelevant. For example, consolidation can occur when sales exceed $ 150 million, regardless of when it occurs.

Once acquired, you get real ownership of the shares. On the other hand, granting options does not grant you the property, but only the right to exercise the options to obtain the property. Many employers believe this gives restricted stocks a motivating edge in directing their efforts toward company goals.

Also, be aware that options may expire and lose value. A drop in the company’s share price can make exercising options unprofitable. Restricted stocks always have the intrinsic value of the market price. Even with a drop in price, you can withdraw your restricted shares at a profit. An option with a $ 25 strike price is worthless if the stock is trading at $ 20 per share. Your restricted shares would still be worth $ 20 whatever the price they were awarded at.

Many companies are beginning to replace their option programs with restricted stock awards. If you have been granted options in the past, restricted stocks may be part of your future.

Also note that the tax treatment of restricted stocks is a bit complicated. For this reason, it is recommended that you consult with a competent tax advisor whenever restricted actions are granted.