Altitude Systems Inc. wants to plan stock grants and stock options for its managerial personnel. In this context, discuss all the available stock option-related plans that the company needs to know.

Question

What will be an ideal response?

Answer 1

The available stock option-related plans that the company needs to be aware of are:
• Stock-for-Stock Swaps: A substantial proportion of companies with stock option plans provide for these swaps. This procedure allows options to be exercised with shares of previously purchased company stock in lieu of cash.
• Stock Appreciation Rights (SARs): SARs are often used with stock option plans. Under an SAR, an executive has the right to relinquish a stock option and receive from the company an amount equal to the appreciation in the stock price from the date the option was granted. The gain is taxed as ordinary income at the time it is received.
• Phantom Stock Plans: These plans can work in several ways. In one form, the company awards stock as a part of its normal bonus plan. The receiver then defers this "phantom" stock until retirement. At retirement, the holder receives the accumulated shares of stock or the equivalent value. In a second form, the receiver is credited with phantom stock. After a stipulated period of time, the receiver is paid, in cash or equivalent shares, an amount equal to the appreciation in the stock.
• Restricted Stock Plans: Under this plan, a company gives shares of stock, subject to certain restrictions, to participating managers. The major restriction of most plans is that the shares are subject to forfeiture until they are "earned out" over a stipulated period of continued employment. The receivers do not put up or risk any of their own money.
• Premium-Priced: They are similar to standard stock options except that the exercise price of the option is set significantly above the current market price of the stock. The holder realizes a gain only when the market value exceeds the exercise price.
• Performance-Vesting Options: Also called price-vesting options, they are priced at the market price but only exercisable if the stock price reaches or exceeds a price goal within a defined period. If the stock price does not reach the price goal within the stipulated time frame, the option is forfeited.