330 Planning and Forecasting
secondary residence. If Brad grants Plant Supply a mortgage on his home to se-
cure the repayment of his no- or low-interest loan, his deemed payment of
market interest may become deductible mortgage interest and may thus offset
his additional deemed compensation from the imaginary return of this interest.
Before jumping into this transaction, however, Brad will have to consider the
limited utility of itemized deductions described earlier as well as certain limits
on the deductibility of mortgage interest.
SHARING THE EQUITY
If Brad is as sophisticated and valuable an executive employee as Morris be-
lieves he is, Brad is likely to ask for more than just a compensation package, de-
ferred or other wise. Such a prospective employee often demands a “piece of
the action,” or a share in the equity of the business so that he may directly
share in the growth and success he expects to create. Morris may even wel-
come such a demand because an equity share (if not so large as to threaten
Morris’s control) may serve as a form of golden handcuffs giving Brad addi-
tional reason to stay with the company for the long term.
Assuming Morris is receptive to the idea, there are a number of different
ways to grant Brad a share of the business. The most direct way would be to
grant him shares of the corporation’s stock. These could be given to Brad with-
out charge, for a discount from fair market value or for their full value, de-
pending upon the type of incentive Morris wishes to design. In addition, given
the privately held nature of Morris’s corporation, the shares would probably
carry restrictions designed to keep the shares from ending up in the hands of
persons who are not associated with the company. Thus, the corporation would
retain the right to repurchase the shares should Brad ever leave the corpora-
tion’s employ or want to sell or transfer the shares to a third party. Finally, in
order to encourage Brad to stay with the company, the corporation would prob-
ably reserve the right to repurchase the shares from Brad at cost should Brad ’s
employment end before a specified time. As an example, all the shares (called
restricted stock) would be subject to forfeiture at cost (regardless of their then
actual value) should Brad leave before one year; two-thirds would be forfeited
if he left before two years; and one-third if he left before three years. The
shares not forfeited (called vested shares) would be purchased by the corpora-
tion at their full value should Brad ever leave or attempt to sell them.
One step back from restricted stock is the stock option. This is a right
granted to the employee to purchase a particular number of shares for a fixed
price over a defined period of time. Because the price of the stock does not
change, the employee has effectively been given the ability to share in what-
ever growth the company experiences during the life of the option, without
paying for the privilege. If the stock increases in value, the employee will exer-
cise the option near the end of the option term. If the stock value does not
grow, the employee will allow the option to expire, having lost nothing. The