Introduction A summary of the range of schemes available in the US

Profit Sharing Plans And Eligible Individual Account Plans (EIAP) An EIAP is a form of profit sharing plan which can be designed to permit up to 100% of trust assets to be invested in employer securities.

Unqualified Broad Stock Options

If an employer does not want to accept the restrictions applying to qualified broad stocks options as described above, he may decide to use unqualified options, in which tax is payable on exercise by the employee (and the employer can take a deduction). This is often the case in whole-company stock option schemes.

Stock options, stock bonuses, and stock purchase plans are increasingly used to provide incentive compensation at all organisational levels to merge the interests of employees, managers, and investors. For employers implementing stock ownership plans in which the underlying stock is subject to regulation under the Securities Exchange Act of 1934, as amended, additional considerations, including securities registration, proxy disclosure, and short-swing profit liability, should be addressed before implementing a plan. In addition, generally, the non-ESOP equity incentive plans are not subject to requirements of ERISA; however, any equity incentive plan which systematically defers payments to the termination of employment or retirement could trigger application of ERISA.

Virtually all broad stock option plans are structured as nonqualified options. A company will give employees either a one-time or annual option grant (the right to purchase shares at a fixed price, usually the market price at the day of the grant) based, in most cases, on a percentage of pay, a merit formula, or, less commonly, on an equal basis. The options are typically subject to three to five-year vesting, meaning that if someone is 20% vested, he or she can only exercise 20% of the options. An employee can usually exercise vested options at any time. Most public companies offer a "cashless exercise" alternative in which the employee exercises the option, and the company gives the employee an amount of stock equal to the difference between the grant price and the exercise price, minus any taxes that are due. The employee must pay ordinary income tax on the "spread" between the grant and exercise price; the company can deduct that amount.

In closely held companies, employees usually have to wait until the company is sold or goes public to sell their shares, although some companies have arrangements to purchase the shares themselves or help facilitate buying and selling between employees. When an employee exercises an option, however, this constitutes an investment decision subject to securities laws. At a minimum, these require "anti-fraud financial disclosure statements" and, in some cases, will require securities registration as well. For this reason, broad stock options are used primarily in closely held companies when the intention is to sell or go public.

Using employee stock ownership as an incentive compensation device provides many benefits for both the employer and the employee. The success of any employee stock ownership plan depends on the employer choosing the correct plan to achieve the desired goals. In selecting an equity incentive plan, the employer must decide what group of employees he/she would like to reward, how closely he/she wants the reward to be tied to performance goals, what type of performance goals would work for the employees, and how the equity incentive plan could be used with work incentives currently in place.

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