rosefrom closetozeroin 2001 to 2.9645millionin 2002
before falling to 2.1 million in 2003.
The switch to restricted stock is likely to continue and
perhapsaccelerateinthefutureasoptionexpensingbecomes
agiven,andthehistoricalaccountingbiastowardemployee
options (created by APB 25) disappears. It is unlikely,
though, thatrestricted stockwill completelyreplace equity
options.Afterall,therearesomefirmsthatwillstillbebetter
served with option grants than restricted stock grants to
managers. In particular, we should expect to see equity
options remain thedominant choice for risky,high-growth
firmsearlyinthelifecycle,tryingtoinduceemployeestobet
onfuturegrowth.Asfirmsmovethroughthelifecycleand
becomealittlemoremature,wewouldexpecttoseeashift
toward restricted stock, as both volatility and growth flag.
Characteristics of Restricted Stock and Variants
Restrictedstockplansgenerallycomewithtwo constraints.
Thefirstrelatestowhethertheemployeestayswiththefirm.
Inmostcases,therestrictedstockisforfeitediftheemployee
terminatesemployment.Thesecondrelatestotradingonthe
stock.Generally, restrictedstockcannotbe tradeduntilthe
end of therestriction period.These two conditions should
makerestrictedstocklessvaluablethanunrestrictedstock.A
variationofrestrictedstockisphantomstock.Withphantom
stock,thefirmdepositshypotheticalsharesinanemployee’s
account.Thesesharesbecomeactualsharesattheendofa
specified period if the employee remains with the firm.
Effectively, there is little difference from a valuation
perspective between restricted stock and phantom stock,
thoughtheremaybeaccountingdifferences.Athirdvariation