NON-QUALIFIED STOCK OPTION



|NON-QUALIFIED STOCK OPTIONS |Employee |Employee |Employee |Same as Incentive Stock Option –|Disclosure via Proxy is |

|NQSO’s |Possibility of large gains. |Stock price changes may not |At exercise, the excess of fair | |required. |

|Option to purchase Company stock|Because the Company currently |parallel Company and Employee |market value of the stock over | | |

|at a fixed price (“strike |has no accounting expense, |performance. |the strike price is taxed as |At Grant of Option |No expense need be recognized so|

|price”) over a fixed period of |limits need not be set on |No gain unless stock price |ordinary income and subject to |Will not be considered a |long as none of the exceptions |

|often 10 years. |Employee gains. However, expect |increases over strike price. |withholding. Taxation for |“purchase” if the plan meets |covered below apply such as |

| |the accounting issue to change |6-month holding requirement |insiders may be delayed to the |certain requirements relating to|readily determinable |

|Strike price usually equal to |2002 ff. |limits flexibility of timing for|end of the required 6-month |administration by disinterested |“performance aspects” apply. In |

|market price at grant date. |Can choose timing of exercise to|insiders. |holding period. |parties, shareholder approval, |instead of expensing, employers |

|Sometimes it is set above market|maximize gains. |Investment required and may need|Company |limits on benefits, and |are currently allowed to account|

|to give Employees something to |Non-insiders may immediately |to borrow money to finance |Tax deduction equal to |non-transferability of the |for stock option grants to |

|shoot for. If it is set below |sell enough stock to cover taxes|option exercise. |Employee’s income from exercise |option. |employees and directors under |

|market, there are effects on tax|and what would have been |Company |at the time taxed to the |Exercise of the Option |Accounting Principles Board |

|and accounting treatments. |financing costs. |Employee gains may not parallel |Employee. |Will be considered a “purchase” |Opinion 25, Accounting for Stock|

| |Exercise by stock for stock |Company performance. | |and will be matched with any |Issued to Employees. |

| |swap. |Opportunity cost: capital will |The IRS has announced that |“sale” in the preceding or | |

| |SAR’s can attached (to provide |be less than if the stock were |Companies should expect to |following 6 months. |Companies that elect to use APB |

| |needed cash). |sold on open market at the time |report Employees' income from | |25 have been required to make |

| |Exercise period after retirement|of exercise. |the exercise of non-qualified | |pro forma footnote disclosure of|

| |without limitation. |Dilutes EPS. |options separately on Forms W-2 | |the cost as if the fair value of|

| |Company |May be an incentive for |for 2003 (to be issued during | |the stock award had been applied|

| |No charge on the income |short-term stock-price |January, 2004.) The new | |under FAS 123, and have had to |

| |statement – This is highly |manipulation. |requirement was originally | |account for stock awards to |

| |likely to change (see Accounting| |announced for 2001, but the IRS | |non-employee service providers |

| |Treatment column). | |decided to postpone action and | |(other than directors) under FAS|

| |Company receives a tax | |made reporting optional for | |123. |

| |deduction. | |2002. The income will be | | |

| |Employee gains parallel | |reported in box 12 of Form W-2 | |APB 25 measures compensation |

| |shareholder gains. | |and identified using Code V - | |cost as the excess, if any, of |

| |Helps Employee ownership of | |Income from exercise of | |the fair market value of the |

| |Company stock. | |non-statutory stock options. | |stock at the grant date or other|

| |Provides increase in capital. | | | |measurement date over the |

| | | | | |exercise price. Stock options |

| | | | | |with a fixed exercise price |

| | | | | |equal to fair market value at |

| | | | | |the date of grant result in no |

| | | | | |compensation expense. |

| | | | | | |

| | | | | |Under current standards, |

| | | | | |treating the fair value of stock|

| | | | | |options as a charge against |

| | | | | |earnings is the preferred, but |

| | | | | |not required, reporting method |

| | | | | |for employees and directors |

| | | | | |described in FASB Statement No. |

| | | | | |123, Accounting for Stock-Based |

| | | | | |Compensation. |

| | | | | | |

| | | | | |However, the inclusion of |

| | | | | |certain features in the option |

| | | | | |agreements, such as |

| | | | | |performance-contingent vesting |

| | | | | |or net exercise payment method |

| | | | | |where the employer withholds |

| | | | | |shares to cover the exercise |

| | | | | |price, and modifications to |

| | | | | |outstanding options, such as |

| | | | | |extension of post-termination |

| | | | | |exercise period or re-pricing to|

| | | | | |current fair market value, could|

| | | | | |result in charges to earnings, |

| | | | | |including variable accounting |

| | | | | |where additional charges are |

| | | | | |taken each reporting period to |

| | | | | |reflect increases in the fair |

| | | | | |value of the stock over the |

| | | | | |exercise price. |

| | | | | | |

| | | | | |This is highly likely to change |

| | | | | |as early as 2005 as a result |

| | | | | |FASB actions and pressures from |

| | | | | |international accounting |

| | | | | |authorities. This is already |

| | | | | |having a significant effect with|

| | | | | |many Companies electing early to|

| | | | | |expense options or to take other|

| | | | | |actions to ameliorate expense |

| | | | | |effects such as accelerating |

| | | | | |vesting on outstanding grants, |

| | | | | |changing into other forms of |

| | | | | |equity plans, and combination |

| | | | | |actions. Indeed, some of the |

| | | | | |large auditing firms are |

| | | | | |demanding that even their |

| | | | | |privately held clients now |

| | | | | |expense options. Private firms |

| | | | | |will be required to expense |

| | | | | |options eventually under the |

| | | | | |proposed standards, the only |

| | | | | |difference being that a measure |

| | | | | |for stock volatility would not |

| | | | | |be required. |

| | | | | | |

| | | | | |Along with the expensing issue |

| | | | | |is the controversy of methods of|

| | | | | |valuation to determine amount to|

| | | | | |expense. The Black Scholes model|

| | | | | |has come under heavy fire for a |

| | | | | |number of reasons that can be |

| | | | | |summarized by citing the fact |

| | | | | |that it was not designed to |

| | | | | |value employee stock options, |

| | | | | |rather open market options that |

| | | | | |have characteristics different |

| | | | | |from stock options. The binomial|

| | | | | |method, which has been advanced |

| | | | | |in the April 2004 FASB Exposure |

| | | | | |Draft as the preferred method, |

| | | | | |also has been criticized for |

| | | | | |shortcomings and proprietary |

| | | | | |modifications have been advanced|

| | | | | |by at least one consulting firm |

| | | | | |to cure anomalies. |

| | | | | | |

| | | | | |Many Companies are switching to |

| | | | | |other forms; principally |

| | | | | |restricted stock, restricted |

| | | | | |stock units, performance |

| | | | | |accelerated options (see below),|

| | | | | |and to a lesser extent, |

| | | | | |performance shares. |

| | | | | | |

| | | | | |Some technology industry |

| | | | | |Companies are fighting the |

| | | | | |change vigorously, and as of |

| | | | | |early 2004, there is a pending |

| | | | | |bill in the House of |

| | | | | |Representatives to limit |

| | | | | |expensing to the five highest |

| | | | | |paid officers. The bill is given|

| | | | | |small likelihood of passing. |

| | | | | | |

| | | | | |Option proceeds and tax savings |

| | | | | |are credited to paid-in capital.|

| | | | | | |

| | | | | |“Performance aspects” that would|

| | | | | |otherwise require expensing may |

| | | | | |not apply provided they are done|

| | | | | |based on “performance |

| | | | | |accelerated” options wherein |

| | | | | |vesting is accelerated if |

| | | | | |certain performance requirements|

| | | | | |are met. |

| | | | | | |

| | | | | |Vesting of stock options (as |

| | | | | |well as other equity awards) can|

| | | | | |be contingent on achievement of |

| | | | | |performance targets – rather |

| | | | | |than simply length of service – |

| | | | | |without being subject to |

| | | | | |variable charges to earnings. |

| | | | | |The exercise price could also be|

| | | | | |tied to some external market |

| | | | | |index to provide further |

| | | | | |incentive. These features |

| | | | | |generally cannot be used under |

| | | | | |APB 25 without triggering |

| | | | | |variable accounting charges. |

|INCENTIVE STOCK OPTION (ISO) |Employee |Employee |Employee |Same as Non-Qualified Stock |There is no expense |

|Option to purchase Company stock|No tax on exercise other than |Options must be exercised in the|At exercise, there is no tax |Option – |recognizable. However, see |

|at a fixed price (“strike |minimum tax on tax preference |order of the grants. |(except for tax on a possible | |comments above under NQSO’s |

|price”) of 100% of market over a|and long-term capital gains tax |Must hold stock from exercised |tax preference). If the shares |At Grant of Option |because ISO’s are caught in the |

|fixed period of up to 10 years. |treatment on qualifying |option 2 years from the date of |are held at least 2 years from |Will not be considered a |same net. |

| |disposition. |grant and 1 year from the date |the grant date and 1 year from |“purchase” if the plan meets | |

|The option is designed to meet |Possibility of large gains. |of exercise to qualify for |exercise (a qualifying |certain requirements relating to|Dilution of share value may |

|statutory requirements including|Because the Company currently |long-term capital gains |disposition), the tax on the |administration by disinterested |occur since options are common |

|sequential exercise, size of |has no accounting expense, |treatment. |sale is at long-term capital |parties, shareholder approval, |stock equivalents. |

|awards to a person, and the |limits need not be set on |3-month exercise limitation on |gains rate on the gain from the |limits on benefits, and | |

|holding period before sale. |Employee gains. However, expect |termination, including |grant to sale date. If holding |nontransferability of the |Option proceeds are credited to |

| |the accounting issue to change |retirement. |period requirements are not met |option. |paid-in capital. |

| |2002 ff. |Maximum grant of $100,000 per |(disqualifying disposition), the|Exercise of the Option | |

| |Can choose timing of exercise to|year, plus limited carry |gain from grant to exercise date|Will be considered a “purchase” | |

| |maximize gains. |forwards. |is taxable as ordinary income; |and will be matched with any | |

| |SAR’s may possibly be attached |Cannot be granted to an Employee|the remainder is at the |“sale” in the preceding or | |

| |(to provide needed cash), if IRS|holding more than 10% of the |short-term capital gains rate. |following 6 months. | |

| |requirements are met. |voting stock of the Company of | | | |

| |Company |all classes of stock before the |When an Employee plans to | | |

| |No charge on the income |option is granted, unless the |exercise an ISO and hold the | | |

| |statement – very likely to |option price is at least 110% of|stock for long-term capital | | |

| |change, however. |fair market value, and the |gains, it is often best to | | |

| |Employee gains parallel |option expires within 5 years of|exercise the option early in the| | |

| |shareholder gains. |the grant date. |year. The Employee then has more| | |

| |Helps Employee ownership of |Stock price changes may not |control of the risk during the | | |

| |Company stock. |parallel Company and Employee |holding period. If the stock | | |

| |Provides increase in capital. |performance. |maintains its value or | | |

| | |No gain unless stock price |appreciates, the Employee may be| | |

| | |increases over strike price. |able to sell it for a long-term | | |

| | |6-month holding requirement |capital gain early next year. | | |

| | |limits flexibility of timing for| | | |

| | |insiders. |If the stock declines in value, | | |

| | |May need to borrow money to |the Employee may be able to use | | |

| | |finance option exercise. |the "escape hatch" to limit the | | |

| | |Company |income from the option exercise | | |

| | |No tax deduction of the Employee|and avoid alternative minimum | | |

| | |makes a qualifying disposition. |tax by selling the stock before | | |

| | |Employee gains may not parallel |the end of the year of exercise.| | |

| | |Company performance. | | | |

| | |Opportunity cost: capital will |Company | | |

| | |be less than if the stock were |No tax deduction at exercise. If| | |

| | |sold on open market at the time |the Employee makes a | | |

| | |of exercise. |disqualifying disposition, the | | |

| | |Options cannot be cancelled and |Company tax deduction is equal | | |

| | |replaced with lower priced |to the amount the Employee’s | | |

| | |options. |ordinary income tax. | | |

|RESTRICTED STOCK |Employee |Employee |Employee |Award and Receipt of the Stock |The value of the stock at grant |

|An award of stock that is |No Employee investment required.|Stock price changes may not |The tax aspects of restricted |Will not be considered a |date ignoring restrictions is |

|nontransferable or subject to a |Possibility of large gains. |parallel Company and Employee |stock have administrative and |“purchase” if the plan meets |charged as compensation expense |

|substantial risk of forfeiture, |A decline in price probably will|performance. |communication aspects that may |certain requirements relating to|over the period for which the |

|or both. |not wipe out the value of the |Restricted stock is a tax |be burdensome. |administration by disinterested |related service is performed |

| |award. |certainty that is included in |Timing – The Employee may take |parties, shareholder approval, |(usually the restriction |

|Dividends are paid to the |The Employee gets stock on very |income upon vesting. |one of two courses: (1) Report |limits on benefits, and if the |period). The entire stock grant |

|Employee as declared. |favorable terms – immediately – |It may be difficult for |the fair market value of the |Employee has no control over the|is immediately dilutive to |

| |Receives dividends |employees to under the |awarded shares as compensation |timing of share receipts. |earnings per share. |

|As a rule of thumb, because |Has voting rights |implications of elections under |in the year all restrictions | | |

|actual shares are delivered with|Tax election options provide |Internal Revenue Code section |lapse, determined on based on | |Inter-period tax allocations may|

|a more secure value than |flexibility. |83(b). |the fair market value of the | |be required, if the Company’s |

|options, and depending upon what|Dividends after vesting are |Under an Internal Revenue Code |awarded shares as of the date | |tax deduction on the spread at |

|economic assumptions are made, |taxed at 15% instead of ordinary|section 83(b) election, |the restrictions lapse. This | |grant date occurs in a later |

|about a quarter to a half or |income tax rates. |Employees cannot get taxes back |results in multiple-year | |period than the accounting |

|more (depending upon equivalency| |if the stock falls in value or |reporting in the case multiple | |expense is charged. Any savings |

|assumptions) of the of the |Company |is forfeited. |year vesting or performance | |on post-grant appreciation |

|number of shares are needed |Employees’ gains are greatest |By definition, there must be |variables that may cause the | |passes the income statement and |

|compared to options to deliver |when shareholders’ are. |restrictions against resale or |original grant to be spread over| |is posted directly as an |

|equivalent value to the |Charges to earnings are known in|there is a risk of substantial |more than one tax year of the | |addition to the paid-in capital |

|Employee. |advance, therefore, |forfeiture. |Employee. (2) Employees can make| |account on the balance sheet. |

| |controllable. | |an election under Internal | | |

|Institutional shareholders |Helps Employee stock ownership. |Company |Revenue Code section 83(b) | |While performance vesting would |

|encourage grants of restricted |Stock is immediately assigned to|Employee gains may not parallel |within 30 days of grant date to | |have triggered variable |

|stock that are subject to |the Employee so identification |Company performance. |report the fair market value at | |accounting under APB 25, it does|

|performance vesting. |with the Company may be |May create adverse shareholder |grant date of the entire grant | |not affect the fixed cost under |

| |stronger. |reaction due to “something for |as compensation in the year of | |FAS 123. |

|If the plan involves the sale of|If stock appreciates after |nothing” flavor or being branded|the grant. In this case, if | | |

|stock, the Employee’s purchase |grant, Company’s tax deduction |as pay for attendance, unless |granted shares are later | | |

|price may be substantially below|exceeds fixed charge to |performance requirements are |forfeited, the Employee is not | | |

|the fair market value. This will|earnings. |blended in. |entitled to a deduction for the | | |

|affect the accounting treatment.|Forfeiture requirements aid in |Explaining Internal Revenue Code|amount previously reported as | | |

| |Employee retention. |section 83(b) elections to |income. Likewise, there is no | | |

| | |employees can be a |recovery of taxes should the | | |

| | |communications and |value of the stock fall between | | |

| | |administration morass. |the grant date and the point at | | |

| | |The Employee’s election on |which restrictions lapse. | | |

| | |taxation timing affects Company |However, if there was any | | |

| | |timing and amount of Company tax|partial payment made for the | | |

| | |deduction. |award property, the Employee is | | |

| | |No cash inflow. |entitled to report a capital | | |

| | |Immediate dilution of EPS for |loss for the amount paid. The | | |

| | |total shares granted. |83(b) election makes any | | |

| | |Fair-market value charged to |appreciation in the value of the| | |

| | |earnings over restriction |stock between grant and actual | | |

| | |period. |delivery eligible for capital | | |

| | | |gains treatment. | | |

| | | |Outside of USA – Some overseas | | |

| | | |jurisdictions tax restricted | | |

| | | |stock upon grant rather than | | |

| | | |award. | | |

| | | |Amount – The fair market value | | |

| | | |of the awarded shares is | | |

| | | |reportable as compensation and | | |

| | | |subject to withholding. If the | | |

| | | |Employee has made an (83)b | | |

| | | |election, the value reportable | | |

| | | |as compensation expense is | | |

| | | |determined without regard to | | |

| | | |restriction (fair market value),| | |

| | | |other than a restriction that by| | |

| | | |its terms will never lapse. | | |

| | | |Again, withholding applies. | | |

| | | |Dividends – Are treated as | | |

| | | |compensation income while | | |

| | | |restrictions are inforce unless | | |

| | | |the Employee elects to be taxed | | |

| | | |currently - an 83(b) election. | | |

| | | |Otherwise, dividends are taxed | | |

| | | |at the rate of 15%. | | |

| | | | | | |

| | | |Company | | |

| | | |On the date the Employee is | | |

| | | |taxed – The deduction is the | | |

| | | |amount of the Employee’s | | |

| | | |ordinary income. The deduction | | |

| | | |will be denied if the Company | | |

| | | |fails to withhold on the | | |

| | | |Employee. | | |

| | | |Dividends – If the Employee has | | |

| | | |made no IRC section 83(b) | | |

| | | |election, then the deduction is | | |

| | | |equal to the dividend amount | | |

| | | |paid while the stock is subject | | |

| | | |to restrictions because it is | | |

| | | |considered compensation expense.| | |

| | | |If an 83(b) election has been | | |

| | | |made, dividends are not | | |

| | | |deductible to the Company | | |

| | | |because they are considered a | | |

| | | |distribution of profits. | | |

| | | |For public companies, grants of | | |

| | | |restricted stock are generally | | |

| | | |not exempt from the $1 million | | |

| | | |limitation on tax-deductible | | |

| | | |compensation applicable to | | |

| | | |public companies under Internal | | |

| | | |Revenue Code section 162(m). | | |

| | | |However, if the grant itself or | | |

| | | |the vesting is performance | | |

| | | |based, the exemption may be | | |

| | | |available. | | |

|RESTRICTED STOCK UNITS (ALSO |Employee |Employee |Employee |If the restricted stock units |As long as the award is payable |

|CALLED DEFERRED STOCK GRANTS) |Via possible deferral of receipt|There are a number of |Timing – Unlike Restricted |are payable only in stock, they |only in shares of stock (and not|

|A Restricted Stock Unit (RSU) |past vesting, tax election |restrictions governing when and |Stock, IRC section 83(b) does |are accounted for in the same |cash), the award is accounted |

|award is an agreement to issue |options can provide flexibility |how employees can make or change|not apply; rather section 451 |manner as restricted stock |for the same as restricted |

|underlying stock at the time of |unavailable with Restricted |the deferral election. At a |applies so no early taxation |awards for both income statement|stock. If they are payable in |

|vesting or later, if allowed by |Stock. |minimum, the deferral election |election is available. |and earnings-per-share purposes.|cash, the units will typically |

|the plan. No shares are |Ensures the payment of taxes at |must be made before the employee|Report the fair market value of |If they are payable in cash, the|be subject to variable-plan |

|delivered until the employee |vesting with an automatic |performs the services for which |the awarded shares as |units will typically be subject |accounting under both APB |

|satisfies the vesting schedule, |withholding of shares |the unit is awarded. Offering a |compensation in the year all |to variable-plan accounting |Opinion No. 25 and SFAS No. 123.|

|or, if the plan allows and the |No Employee investment required.|deferral election to large |restrictions lapse (including |under both APB Opinion No. 25 | |

|employee properly elects |Possibility of large gains. |numbers of employees can subject|any elected deferral) and shares|and SFAS No. 123. |The value of the stock at grant |

|(meaning recipient does not |A decline in price probably will|the plan to ERISA. Finally, |are delivered, determined on | |date ignoring restrictions is |

|control the timing after the |not wipe out the value of the |deferral applies only to income |based on the fair market value |Award and Receipt of the Stock |charged as compensation expense |

|units are earned) the employee |award. |taxes; employment taxes are |of the awarded shares as of the |Will not be considered a |over the period for which the |

|may defer receipt past vesting |May receive dividends if the |typically due when the unit |date the restrictions lapse. |“purchase” if the plan meets |related service is performed |

|by a fixed period or until |plan allows. Dividends are not |award vests, even when the |This results in multiple-year |certain requirements relating to|(usually the restriction |

|retirement. |legally required to be paid or |employee has made a deferral |reporting in the case multiple |administration by disinterested |period). As of early 2004, |

| |accrued during the vesting |election. During the deferral |year vesting or performance |parties, shareholder approval, |according to the assertion of |

|RSUs are similar to restricted |period. Otherwise, dividends are|period, the restrictions have |variables that may cause the |limits on benefits, and if the |one Big Four firm, Deloitte & |

|stock in that they are |accrued until share receipt and |lapsed and the RSUs become |original grant to be spread over|Employee has no control over the|Touche, “the value of earnings |

|nontransferable or subject to a |are subject to typically being |deferred stock units, DSUs, and |more than one tax year of the |timing of share receipts other |per share is indifferent to RSUs|

|substantial risk of forfeiture, |held back as part of net for tax|are subject to Medicare tax in |Employee. |than properly elected deferral. |versus restricted stock” where |

|or both. |withholding. Alternatively, |the deferral period. |Deferral applies only to income | |the entire stock grant would be |

| |dividends may be applied to |Stock price changes may not |taxes; employment taxes are | |immediately dilutive to earnings|

|The main advantage of RSUs |purchase additional units. |parallel Company and Employee |typically due when the unit | |per share. At least one other |

|versus restricted stock is the |Dividends after actual receipt |performance. |award vests, even when the | |Big Four firm, KPMG, takes the |

|ability for employees to defer |of shares are taxed at 15% |Restricted stock is a tax |employee has made a deferral | |opposite position. |

|taxation. |instead of ordinary income tax |certainty that is included in |election. During the deferral | | |

| |rates. |income upon actual receipt (this|period, the restrictions have | |Inter-period tax allocations may|

|As a rule of thumb, because |Restricted stock awards are |is ameliorated to the degree of |lapsed and the RSUs become | |be required, if the Company’s |

|actual shares are delivered with|often subject to tax at grant |withholding required before |deferred stock units, DSUs, and | |tax deduction on the spread at |

|a more secure value than |outside the US; restricted stock|receipt). |are subject to Medicare tax in | |grant date occurs in a later |

|options, and depending upon what|units are more likely to be |Typically, there are no rights, |the deferral period. | |period than the accounting |

|economic assumptions are made, |subject to tax only upon |including voting, until receipt |Amount – The fair market value | |expense is charged. Any savings |

|about a quarter to a half or |vesting. This is generally |of shares. |of the awarded shares is | |on post-grant appreciation |

|more (depending upon equivalency|preferable to employees, so |By definition, there must be |reportable as compensation and | |passes the income statement and |

|assumptions) of the of the |restricted stock units are often|restrictions against resale or |subject to withholding. At | |is posted directly as an |

|number of shares are needed |offered internationally, even |there is a risk of substantial |actual receipt of the shares, | |addition to the paid-in capital |

|compared to options to deliver |when restricted stock awards |forfeiture. |the taxes owed are netted out of| |account on the balance sheet. |

|equivalent value to the |apply to US employees. |The tax treatment of units may |the available units and any | | |

|Employee. | |be unfavorable compared to stock|accrued dividends before the | |The units may be contingent on |

| | |options when international |employee receives the shares. | |performance targets without |

| |Company |considerations are taken into |Dividends – Are treated as | |triggering variable accounting |

| |Employees’ gains are greatest |account. Many countries have |compensation income while | |(which would make the units |

| |when shareholders’ are. |established some form of |restrictions are inforce. | |eligible for exemption from the |

| |Postpones shareholder dilution |qualified or approved stock |Otherwise, dividends are taxed | |IRC section 162(m) $1 million |

| |until actual receipt occurs. |option program that provides |at the rate of 15%. | |deduction limit applicable to |

| |The communications and |favorable tax treatment, but few| | |public companies). (This comment|

| |administration morass associated|countries have similar programs |Company | |is repeated under Tax Treatment |

| |with IRC section 83(b) is |for restricted stock awards or |On the date the Employee is | |column.) However, see cash |

| |avoided (see Tax Treatment |units. Offering qualified stock |taxed – The deduction is the | |payment requirements above. |

| |column). |option plans can also eliminate |amount of the Employee’s | | |

| |Facilitates payment of taxes at |costly social insurance taxes |ordinary income. The deduction | | |

| |receipt with an automatic |that apply to both the employee |will be denied if the Company | | |

| |withholding of shares. |and employer. In such countries,|fails to withhold on the | | |

| |One-third of Microsoft’s |it may be preferable to continue|Employee. | | |

| |employee population resides |offering stock options under a |Dividends – If the Employee has | | |

| |outside of the U.S., and using |qualified plan, instead of |made no 83(b) election, then the| | |

| |straight restricted stock would |offering restricted stock. |deduction is equal to the | | |

| |have accelerated taxation to the|Company |dividend amount paid while the | | |

| |grant date in many countries. |Employee gains may not parallel |stock is subject to restrictions| | |

| |Charges to earnings are known in|Company performance. |because it is considered | | |

| |advance, therefore, |As with regular restricted |compensation expense. If an | | |

| |controllable. |stock, may create adverse |83(b) election has been made, | | |

| |Helps Employee stock ownership. |shareholder reaction due to |dividends are not deductible to | | |

| |If stock appreciates after |“something for nothing” flavor |the Company because they are | | |

| |grant, Company’s tax deduction |or being branded as pay for |considered a distribution of | | |

| |exceeds fixed charge to |attendance, unless performance |profits. | | |

| |earnings. |requirements are blended in. | | | |

| |Forfeiture requirements aid in |Shareholder reaction may be |The units may be contingent on | | |

| |Employee retention. |further aggravated if the shares|performance targets without | | |

| | |appreciate substantially before |triggering variable accounting | | |

| | |receipt. |(which would make the units | | |

| | |Fair-market value charged to |eligible for exemption from the | | |

| | |earnings over restriction |IRC section 162(m) $1 million | | |

| | |period. |deduction limit applicable to | | |

| | |No cash inflow. |public companies). (This comment| | |

| | |Can result in cash outflow if |is repeated under Accounting | | |

| | |shares are used to cover the |Treatment column.) | | |

| | |required tax payments. | | | |

|STOCK APPRECIATION RIGHT (SAR) |Employee |Employee |Employee |At grant of the Right |The assumption in most cases is |

|Normally granted in tandem with |Possibility of large gains. |Stock price changes may not |At exercise, the value of the |Will not be considered a |that the SAR, and not the |

|an option where the Employee |Avoids financing costs of |parallel Company and Employee |rights is taxed as ordinary |“purchase” if the plan meets |option, will be exercised. |

|can, instead of exercising the |options. |performance. |income and subject to |certain requirements relating to|Therefore, the value of the |

|option, receive a “payment” (in |To a limited extent, the |Possibility of large gain may be|withholding. |administration by disinterested |right, that is, the excess of |

|cash or stock) equal to the |Employee can control the timing |limited by maximums imposed to |Company |parties, shareholder approval, |the market value of the stock |

|appreciation in the stock. SAR’s|of the options or right’s |limit accounting charge. |Tax deduction equal to |limits on benefits, and |over the option price at the |

|may be attached to ISO’s if IRS |exercise to be coincident with a|Any exercise for cash by an |Employee’s income. |nontransferability of the option|close of each accounting period |

|requirements on exercise are |market high. |insider must be made in a short | |and related right. |is a compensation expense that |

|met. SAR’s may also be granted |If paid in cash, no stock |period after quarterly financial| |Full or Partial Cash Payment |is accrued over the period the |

|on a “stand alone” basis. |turnover problems and no risk of|statements are released. This | |Any payment of the SAR in cash |SAR is outstanding (variable |

| |insider losing a gain. |timing may not produce the | |is not a “purchase” or “sale” if|accounting). |

|Payment may be denominated in |Company |highest gain. | |the Company files certain | |

|cash, stock, or a combination. |Employee gains parallel |If SAR’s are granted independent| |financial data with he SEC and |If the SAR is payable in stock |

| |shareholder gains. |of options, the Employee may be | |the plan requires a 6-moth |rather than cash, the |

| |Can help Employee ownership of |taxed on the increase in SAR | |holding period, is administered |compensation cost is fixed |

| |Company stock if gains are paid |value if the SAR expires | |by disinterested parties, has |rather than variable – the same |

| |in stock. |unexercised at the end of its | |shareholder approval, and |as options. |

| |Dilution can be lessened if |term. | |permits exercise only during a | |

| |gains are paid in stock and in |Company | |“window period.” * |Inter-period allocation may be |

| |lieu of options. |Employee gains may not parallel | |Exercise during the “window |required if the Company’s tax |

| |Because there is no exercise |Company performance. | |period”* is not required if the |deduction occurs in a later |

| |price, there is no issue |Charges to earnings could be | |exercise is more than 6 month |period than the accounting |

| |regarding provision of loans or |large, and are unknown in | |the grant date, and is fixed in |expense is charged. |

| |cashless exercise methods that |advance and open-ended. | |advance or is outside of the | |

| |are problematic for public |Charges to earnings may not | |Employee’s control. | |

| |companies under Sarbanes-Oxley. |follow performance and may | |Full Payment in Stock | |

| | |fluctuate greatly between | |Any payment in stock is a | |

| | |accounting periods. | |“purchase” and will be matched | |

| | | | |with any “sale” in the preceding| |

| | | | |or following 6 months. | |

| | | | | | |

| | | | |* “Window period” is the 3rd | |

| | | | |through the 12th business day | |

| | | | |period following the release of | |

| | | | |quarterly or annual Company | |

| | | | |financial statements. | |

|PHANTOM STOCK |Employee |Employee |Employee |Grants of units – |The excess of the stock’s value |

|Units analogous to Company |Possibility of large gains. |Stock price changes may not |On the payment date – the value |Will not be considered a |(at the close of each accounting|

|shares are granted to the |Avoids financing costs of |parallel Company and Employee |of the units is taxed as |“purchase” if the plan meets |period) over its value at the |

|Employee. The value of the units|options – no cash outlay. |performance – there is no gain |ordinary income and is subject |certain requirements relating to|date of the award is a |

|equals the appreciation in the |If paid in cash, then no stock |unless the market value of the |to withholding. |administration by disinterested |compensation expense that is |

|market value of the stock |turnover problems and no risk of|stock increases. |Company |parties, shareholder approval, |accrued over the period the |

|underlying the units. |insider losing gains. |Possibility of large gains may |On the payment date – the |and limits on benefits. |units are outstanding. |

| |Dividend equivalents may be |be limited by imposed maximum |Company has a tax deduction |Full or partial payment in cash | |

|Phantom units are valued at a |accrued. |intended to limit accounting |equal to the amount of the |– | |

|fixed date. Usually the |Company |charges. |Employee’s income. |Any payment in cash is not a | |

|valuation is at retirement, or |Employee gains parallel |Any exercise for cash by | |“purchase” and/or a “sale” if | |

|five to fifteen years after the |shareholder gains. |insiders must be made in a short| |the Company files certain | |

|grant. |Can help Employee ownership of |period after quarterly financial| |financial data with the SEC and | |

| |Company stock if the awards are |statements are released and such| |the plan requires a six-month | |

|Actual payment may be made in |paid in stock. |timing may interfere with | |holding period, is administered | |

|cash, stock, or a combination of|No ownership dilution when |maximizing gains. | |by disinterested parties, has | |

|the two. |settled in cash. |No flexibility in choosing when | |shareholder approval, and | |

| | |to value the award – the | |permits exercise only during a | |

|Phantom stock mirrors Stock | |valuation date may be at an | |“window period.” | |

|Appreciation Rights (SAR’s) tax,| |inopportune time. | |Exercise during a “window | |

|accounting, and insider trading | |Insiders risk gain for payouts | |period” is not required if the | |

|treatments. | |in stock. | |exercise date is more than six | |

| | |Company | |months from the date of grant | |

| | |Employee gains may not parallel | |and is fixed in advance or is | |

| | |Company performance. | |outside of the Employee’s | |

| | |Charges to earnings can be | |control. | |

| | |significant, are unknown in | |Full payment in stock | |

| | |advance, and are open-ended, | |Any payment in stock is a | |

| | |unless otherwise capped in the | |“purchase” and will be matched | |

| | |plan. | |with any “sale” in the preceding| |

| | |Charges to earnings may not | |or following six months. | |

| | |follow earnings performance and | |Third through the twelfth | |

| | |may fluctuate greatly between | |business day period following | |

| | |accounting periods. | |the release of quarterly or | |

| | | | |annual Company financial | |

| | | | |statements. | |

|PERFORMANCE UNIT |Employee |Employee |Employee |At the Award of the Units |The value of the units is a |

|An Employee is contingently |The reward is related to a |Gains can be zero if performance|On the payment date – The value |None. |compensation expense that is |

|awarded units at the beginning |measure such as EPS over which |against goals is not |of the award paid is taxed as | |estimated and accrued over the |

|of a performance cycle, each of |the Employee has more control |sufficiently met. |ordinary income and is subject |At Full or Partial Payment in |period during which the Employee|

|which is assigned an arbitrary |than over stock price. |Company |to withholding. |Cash |performs the related services. |

|dollar value. The number of |It is possible to have no stock |Employee gains may not parallel |Company |None. | |

|units at the end of the cycle |turnover problems if it is paid |shareholder gains – earning |On the payment date – The | |Inter-period tax allocation may |

|depends upon the extent to which|at least partially in cash. |could rise while stock price |Company can take a tax deduction|At Full or Partial Payment in |be required if the Company’s tax|

|financial results have been |It avoids the financing |falls. |in the amount of the payment. |Stock |deduction occurs in a later |

|achieved. Alternatively, the |difficulties of options. |The choice of and setting of | |It will not be considered a |period than the accounting |

|number of the units might be |Company |growth targets may be difficult | |“purchase” or “sale” if the plan|expense is charged. |

|fixed with the value of the |There is a direct relation |for some Companies. | |meets certain requirements | |

|units varying by performance. |between Employee and Company | | |relating to administration by | |

| |gains from performance. | | |disinterested parties, | |

|The duration of the performance |Charges to earnings can be known| | |shareholder approval, limits on | |

|cycle varies by Company, but is |in advance and controlled, and | | |benefits, and if the Employee | |

|typically three to five years. |will follow earnings | | |has no control over the timing | |

|Financial objectives may relate |performance. | | |or form of share receipts. | |

|to such items as cumulative |The plan can communicate the | | | | |

|growth in EPS or improvement in |importance of growth goals. | | | | |

|ROI. |The Company can link Employee | | | | |

| |rewards to the planning process.| | | | |

|Payment may be in stock, cash, |The forfeiture requirement aids | | | | |

|or a combination of both. |in Employee retention. | | | | |

| |It can help build Employee | | | | |

| |ownership of Company stock if | | | | |

| |awards are paid in stock. | | | | |

|PERFORMANCE SHARE |Employee |Employee |Employee |Award of Performance Shares – |The value of the shares is a |

|An Employee is contingently |The reward is partially related |Gains can be zero if performance|On the payment date – The value |Will not be considered a |compensation expense that is |

|awarded a fixed number of common|to a measure; for example, EPS, |against goals is not |of the award paid is taxed as |“purchase” if the plan meets |estimated and accrued over the |

|shares of stock at the beginning|over which the Employee has more|sufficiently met. |ordinary income and is subject |certain requirements relating to|period during which the Employee|

|of a performance cycle. The |control than over stock price. |Given equal financial |to withholding. |administration by disinterested |performs the related services. |

|number of shares payable at the |Avoids the financing |performance, gains will vary |Company |parties, shareholder approval, |Unlike a performance unit plan, |

|end of the cycle depends upon |difficulties of options. |between generations of |On the payment date – The |and limits on benefits. |changes in the market value of |

|the extent to which financial |Company |Employees, depending on stock |Company can take a tax deduction| |the stock are also reflected. |

|objectives have been achieved. |Employee gains are related to |price growth. |for income. |Full or Partial Cash or Stock | |

|The value received by the |both Company performance and |Possibility of large gains may | |Payment – |Inter-period tax allocation may |

|Employee depends both on the |shareholder gains. |be limited by maximum imposed to| |Will not be considered a |be required if the Company’s tax|

|number of shares earned and |It can help build Employee |limit accounting charges. | |“purchase” or “sale” if the |deduction occurs in a later |

|their market value at the time |ownership of Company stock if |Ending performance period set | |above conditions are met and if |period than the accounting |

|of payment. |awards are paid in stock. |forth in the plan may not be | |the Employee has no control over|expense is charged. |

| |The plan can communicate the |most advantageous timing in | |the timing or form of receipt. | |

|The duration of the performance |importance of growth goals. |terms of stock price. | | |Under FAS 123, performance |

|cycle varies, but is typically |The Company can link Employee |Stock turnover may be required | | |shares may be valued using the |

|three to five years. Financial |rewards to the planning process.|to satisfy tax liability. | | |option-pricing model on the date|

|objectives may relate to such |The forfeiture requirement aids |Company | | |of grant. |

|items as cumulative growth in |in Employee retention. |Choice and setting of growth | | | |

|EPS or improvement in ROI. | |targets may be difficult for | | | |

| | |Companies. | | | |

|Payment may be in stock or cash | |Charges to earnings could be | | | |

|of an equivalent amount. | |significant, are unknown in | | | |

| | |advance and open-ended. They are| | | |

| | |hard to budget for since the | | | |

| | |Company cannot (and should not | | | |

| | |be able to) reliably predict | | | |

| | |whether shares will vest. This | | | |

| | |makes them less attractive than | | | |

| | |restricted stock from an | | | |

| | |accounting simplicity | | | |

| | |standpoint. | | | |

|COMBINATION PERFORMANCE UNIT AND|Employee |Employee |Employee |Award of Unit – |Each part of the combination |

|OPTION |The reward is partially related |Gains could be zero when |On payment of units – The value |None. |plan is accounted for |

|The simultaneous grant of |to a measure; for example, EPS, |earnings targets are not met and|of award paid to the Employee is| |separately, ignoring the |

|performance units and a |over which the Employee has more|stock price fails to rise. |taxed as ordinary income and is |Full or Partial Cash Payment of |existence of the part. |

|non-qualified option granted at |control than over stock price. |Sales by insiders are limited by|subject to withholding. |Unit – | |

|market value. |If performance targets are |the six-month rule, so they risk|On exercise of options – The |None. |Units – |

| |reached, payout is made |any gain, taxes, and opportunity|excess of the market value of | |The value of the units is a |

|Payout from the units is in cash|regardless of market action, yet|or borrowing cost for that time.|the stock over the option price |Full or Partial Stock Payment of|compensation expense that is |

|to enable the Employee to pay |upside market movement is |Company |is taxed as ordinary income and |Unit – |estimated and accrued over the |

|taxes on the exercise of the |captured. |Choice and setting of growth |is subject to withholding. |Will not be considered a |period during which the Employee|

|option or to help finance the |Limits need not be set on |targets may be difficult for |Company |“purchase” or “sale” if the plan|performs the related services. |

|exercise. |Employee gains from options. |some Companies. |On payment of units – The |meets certain requirements |Although the Company’s tax |

| |The Employee can use the cash |Opportunity cost: capital will |Company can take a tax deduction|relating to administration by |deduction may not occur until |

|Some plans provide for the |from the performance unit to |be less than if the option |in the amount of the Employee’s |disinterested parties, |the date of payment, the |

|cancellation of one award when a|cover option-financing costs, |shares were sold on the open |ordinary income. |shareholder approval, limits on |compensation expense for |

|gain is realized from the other |which reduces stock turnover. |market the time of exercise. |On exercise of options – The |benefits, and the Employee has |accounting purposes is currently|

|half of the award – such |Company | |Company can take a tax deduction|no control over the timing or |charged. |

|cancellations cannot be made in |Employee gains parallel Company | |in the amount of the Employee’s |form of share receipts. |Options – |

|conjunction with an ISO. |performance. | |ordinary income at the time the | |No expense is recognized, but |

| |No charge to income for market | |Employee is taxed. |Grant of Option – |disclosure is required. This is |

|Options granted at a discount to|appreciation of the stock. | | |Will not be considered a |likely to change. Option |

|market value will affect tax and|The forfeiture requirement aids | | |“purchase” if the plan meets |proceeds and tax savings are |

|accounting treatments. |in Employee retention. | | |certain requirements relating to|credited to paid-in capital. |

| |The plan can communicate the | | |administration by disinterested | |

| |importance of growth goals. | | |parties, shareholder approval, | |

| |The Company can link Employee | | |limits on benefits, and | |

| |rewards to the planning process.| | |non-transferability of the | |

| |Can help build Employee | | |option. | |

| |ownership of Company stock if | | | | |

| |awards are in stock. | | |Exercise of Option – | |

| | | | |Will be considered a “purchase” | |

| | | | |and will be matched with any | |

| | | | |“sale” in the preceding or | |

| | | | |following six months. | |

|BOOK VALUE STOCK PURCHASE |Employee |Employee |Employee |Grant of Right – |No expense is recognized, but |

|An Employee is offered |High potential for gains. Gains |Stock may only be sold to the |At purchase – No tax |Will not be considered a |disclosure is required. This is |

|opportunities to purchase shares|will not be zero unless the |Company. |consequences. |“purchase” if the plan meets |likely to change. Option |

|of stock whose prices are |Company incurs losses. |Lacks open-market stock |At sale – The increase in book |certain requirements relating to|proceeds are credited to paid-in|

|determined by reference to book |Reward is related to a measure |appreciation potential. |value from the date of purchase |administration by disinterested |capital. |

|value of the Company. Shares |over which the Employee has more|Financing costs could be |is taxed as a long-term capital |parties, shareholder approval, | |

|must be resold to the Company at|control than over stock price. |significant. |gain if held for the required |limits on benefits, and | |

|a later date at the then per |Company |Company |holding period; otherwise, it is|non-transferability of the | |

|share book value. |No charges to earnings. This is |Because each dollar of net |taxed at ordinary income rates. |option. | |

| |likely to change. |income after any dividends |Dividends – Are taxed as | | |

|Shares for a book value plan may|Additional source of equity |increases book value, an |ordinary income when received. |Exercise of Right – | |

|be a separate, non-voting class |capital. |Employee could receive payouts |Company |Will be considered a “purchase” | |

|of stock. Holders of this class | |when earnings are falling. |At purchase, resale, or payment |and will be matched with any | |

|of stock could receive dividends| |Could lead to retention of |of dividends – There is no tax |“sale” in the preceding or | |

|as paid. | |low-earning assets and avoidance|deduction. |following six months. | |

| | |of risk investment. | | | |

|The offer is usually for a | |Relatively few public Companies | | | |

|limited amount of time. | |have used this approach. | | | |

| | |No tax deduction. | | | |

|The plan is commonly used in | |For publicly held Companies, | | | |

|closed held Companies. | |there is an opportunity cost to | | | |

| | |extent that book value is less | | | |

|Book value may be used instead | |than market value. | | | |

|of market value in the design of| | | | | |

|stock options, stock | | | | | |

|appreciation rights, and phantom| | | | | |

|stock plans. | | | | | |

| | | | | | |

|Shares granted at a discount | | | | | |

|will affect tax and accounting | | | | | |

|treatments. | | | | | |

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