way in which these firms could attract and hold onto
employees was by offering them noncash compensation,
usuallywiththeonlycurrencyofvaluethattheyhad,which
was their own equity.
3.Employeeretention.Mostequitycompensationcomeswith
a requirement that the employeestay with the firm for a
period of time (the vesting period) to lay claim to the
compensation.Employeeswhoreceiveoptions orrestricted
stockascompensationarethereforemorelikelytostaywitha
firm, especially if the equity grant represents a large
proportion of their overall wealth.
2
- Accountingand tax treatment. Themove toward equity
compensation has been aided and abetted by accounting
standards that have treated firms that use equity-based
compensationmuchmoregenerously(byallowing themto
report higher earnings) than firms that use cash-based
compensation,andby taxlawsthatprovidetaxbenefitsto
firms that use options to reward employees.
Of the three forms of equity compensation, the use of
common stock represents the fewest problems from a
valuationperspective.Thevalueofthestockgrantistreated
asacompensationexpense(whenthegrantismade)andthe
numberofsharesincreasesinthefirm.Stock optiongrants
andrestrictedstockcreatemoredifficultissuesforanalysts,
bothinmeasuringearningsinanyperiodandincomingup
withvaluespershare.Inthesectionsthatfollow,wefirstlook
atequityoptionsandthenturnourattentiontorestrictedstock
issues.