...Questions: 1. Why do companies use stock options to compensate employees? What are the advantages of stock options relative to cash compensation? What, if any, are their disadvantages? 2. What, if any, risks do Dell’s shareholders face from Dell’s stock option program? Draw terminal payoff diagrams to illustrate the risk. Is this risk something that shareholders of Dell expect to bear when investing in Dell? 3. How does Dell remove, or hedge, the perceived risk of the stock options program for shareholders? Draw terminal payoff diagrams to illustrate. 4. Why does Dell transact in both call and put options? Use put-call parity to reformulate the put and call positions that Dell takes in terms of Dell’s stock and borrowing. What effectively does Dell’s call and put positions accomplish? Is risk management the primary motivation for Dell’s actions? A stock option is an offer by a company that gives employees the right to buy a specified number of shares in the company at an agreed upon price (usually lower than market) by a specific date. The benefit of granting options to employees is viewed as a good thing because it (theoretically) aligned the interests of the employees (normally the key executives) with those of the common shareholders. If a material portion of a CEO's salary were in the form of options, she or he would be incited to manage the company well, resulting in a higher stock price over the long term. The higher stock price would benefit both the executives...
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...consequences of using employee stock options as a motivator? Ans: Employee Stock Options (ESO): An employee stock option is a contract issued by an employer to an employee to purchase a set amount of shares of company stock at a fixed price for a limited period of time. A stock option granted to specified employees of a company. ESOs carry the right, but not the obligation, to buy a certain amount of shares in the company at a predetermined price. An employee stock option is slightly different from a regular exchange-traded option because it is not generally traded on an exchange, and there is no put component. Furthermore, employees typically must wait a specified vesting period before being allowed to exercise the option. Types of Employee Stock Options: There are two broad classifications of stock options issued: 1: Non-qualified stock options (NSO) 2: Incentive stock options (ISO). Practical Consequences Explanation: The idea behind stock options is to align incentives between the employees and shareholders of a company. Shareholders want to see the stock appreciate, so rewarding employees when the stock goes up ensures, in theory, that everyone is striving for the same goals. Critics point out, however, that there is a big difference between an option and the ownership of the underlying stock. If the stock goes down, the holder of an option would lose the opportunity for a bonus, but wouldn't feel the same pain as the owner of the stock. This is especially true...
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...(Fed.Cl) No. 09-772T FACTS Plaintiff Donald Schroerlucke is a former employee of WorldCom, Inc. His wife is Joyce D. Schroerlucke. In 1989, Mr. Schroerlucke was employed as Vice President of Operations at Long Distance Discount Services, Inc., the predecessor corporation to WorldCom. Pursuant to stock option agreements with Long Distance Discount Services, Inc., and then with WorldCom, Mr. Schroerlucke accumulated employee stock option grants between July 1991 and January 1998. His employment with WorldCom ended on January 4, 1999. According to the terms of the stock option agreements and an April 7, 1998 memorandum titled, “WorldCom Employee Stock Option Program,” Mr. Schroerlucke was required to immediately exercise all of his employee stock options at the end of his employment. On January 2, 1998, Mr. Schroerlucke had accumulated 172,492 WorldCom stock options. Mr. Schroerlucke exercised all of his existing stock options on February 12, 1999, at which time the market value of his 172,492 WorldCom shares was $13,702,333.25, based on the $79.4375 per share, February 12, 1999, closing price of WorldCom stock.1. According to the criminal Mr. Ebbers (CEO) and Mr. Sullivan (CFO Scott Sullivan) presented a “materially false and misleading picture of WorldCom’s operating performance and financial results” as part of a “scheme to deceive” and “inflate and maintain artificially the price of WorldCom common stock.” Mr. Schroerlucke was not eligible to participate in the securities...
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...tax returns during all years relevant to this action. In each of those years, the plaintiffs were residents of the State of Georgia. Plaintiff Donald Schroerlucke is a former employee of WorldCom, Inc. In 1989, Mr. Schroerlucke was employed as Vice President of Operations at Long Distance Discounts Services, Inc., the predecessor corporation to WorldCom. Pursuant to stock option agreements with Long Distance Discount Services, Inc., and then with WorldCom, Mr. Schroerlucke accumulated employee stock option grants between July 1991 and January 1998. Mr. Schroerlucke’s employment with WorldCom ended on January 4, 1999, at which time his stock options became fully and immediately vested according to the terms of the stock option agreements and an April 7, 1998 memorandum titled, “WorldCom Employee Stock Option Program,” once his employment ended, Mr. Schroerlucke was required to immediately exercise all of his employee stock options. The April 7, 1998 memorandum stated in part: “Please note that under WorldCom Inc. 1997 Stock Option Plan, all vested options must be exercised prior to termination with the Company.” After a final stock option grant award on January 2, 1998, Mr. Schroerlucke had accumulated 172,492 WorldCom stock options. Mr. Schroerlucke exercised all of his existing stock options on February 12, 1999, at which time the market value of his 172,492 WorldCom shares was 13,702,333.25, based on the...
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...market repurchases and employee options Kathleen M. Kahle* Katz Graduate School of Business, University of Pittsburgh, Pittsburgh, PA 15260, USA (Received 20 September 2000; accepted 6 June 2001) Abstract This paper examines how stock options affect the decision to repurchase shares. Firms announce repurchases when executives have large numbers of options outstanding and when employees have large numbers of options currently exercisable. Once the decision to repurchase is made, the amount repurchased is positively related to total options exercisable by all employees but independent of managerial options. These results are consistent with managers repurchasing both to maximize their own wealth and to fund employee stock option exercises. The market appears to recognize this motive, however, and reacts less positively to repurchases announced by firms with high levels of nonmanagerial options. JEL Classification:G30, G32 Key Words: share repurchase, executive stock options, employee stock options I thank Ken Lehn, Frederik Schlingemann, Kuldeep Shastri, René Stulz, Shawn Thomas, Cynthia von Skansen, Ralph Walkling, and an anonymous referee for helpful comments and suggestions. Tomas Jandik and Gang Hu provided excellent research assistance. * Tel.: 412 648 1519, Fax: 412 648 1693 E-mail address: kkahle@katz.pitt.edu 0304-405X/00$-see front matter © 2002 Elsevier Science S.A. All rights reserved 1. Introduction Early studies of open market stock repurchases document positive...
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...Bonuses…………………………………………………………………………………………………………………...................7 Sales Commissions……………………………………………………………………………………………………………………8 Medical Benefits………………………………………………………………………………………………………………………11 Retirement Benefits………………………………………………………………………………………………………………..12 Stock Options………..………………………………………………………………………………………………………………...13 Recommendations……………………………………………………………………………………………………………………14 Conclusion………………………………………………………………………………………………………………………………..15 Reference…………….……………………………………………………………………………………………………………………16 Executive Summary Employee Compensation Strategies There are many ways a company can compensate an employee for their contribution to the organization. Companies offer a wide range of bonus/commissions to employees so that they can share in the company’s success. They come as cash and non-cash awards. Many corporations use profit sharing as a way to motivate an employee to work harder so they sell more. Bonus/commissions range from 2.5% - 7.5% if the corporation earns a profit. Spot bonus awards can be for providing exceptional customer service. They can be a gift card to a movie discount retailer, or cash. Recognitions are announcements in front of other employees. Sales commissions awards from the sales department when the employee sells over a certain amount of product. The percentage goes up the more they sell. Do we pay Employees to Exist or to Produce? Retaining good, productive employees is critical for a corporation. Rewarding employees and having...
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...Major Recommendations of the stock-based compensation pronouncement. Generally, the rule indicates that employee stock options be treated like all other types of compensation and that their value be included in financial statements as part of the costs of employee services. The rule requires that all types of stock options be recognized as compensation based on the fair value of the options. Fair value for public companies would be estimated using an option-pricing model. No adjustments after the grant date would be made for changes in the stock price—either up or down. For both public and nonpublic companies, the value of the award would be charged to expense over the period in which employees provide the related service, which is generally considered the vesting period. Expense is recognized over the service period with adjustment (reversal) of expense for options that do not vest, if employees do not meet the service requirement. (b) The provisions of GAAP in this area differ from the bill introduced by members of Congress (Dreier and Eshoo) According to Ciesielski’s commentary, the bill in Congress would only record expense for the options granted to the top five executives. They also are recommending that the SEC conduct further study of the issue and therefore delay the implementation of the new standard. From a comparability standpoint, it is highly unlikely that recording expense on only some options would result in useful information...
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...profitability of the firm. • Employee stock plan: A plan through which employees are provided with option to purchase shares in their employer at a fixed price within a limited time period. • Long term incentives: A type of performance pay in which the incentives are tied to an organization performance horizon that ranges beyond one year, often three years to five years. The basic aim of organizational performance pay is to promote organizational citizenship behaviour, membership behaviour and positive group norms. As in the case of Fit Stop we can clearly see that they will be trying to follow the high involvement management style as they want their employees to be motivated so they can provide exceptional service to the customers. In this case the organizational performance pay is optimal because it will motivate the employees to do whatever it takes to work effectively and efficiently so that they can achieve the organisational goal. The organizational performance plan that is most appropriate according to my knowledge is employee stock plan. As the company is in its initial stage and it will take time to establish its place in the market and start earning profit, the profit sharing plan will not motivate the employees to an extent and even if it will create a temptation for the employees, there will be a liability on the company which is still in its initial stage, actually not good for the reputation of the company too. Through employee stock option plan, employees will have...
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...be a long day, but I felt good that all the products and services I'd used so far had come from companies where the employees were substantial or principal owners. Why Employee Ownership Is Popular There are a number of reasons for the popularity of employee stock plans. ESOPs provide attractive tax benefits. They allow companies to borrow money and repay it in pretax dollars. They provide a way for owners of closely held businesses to sell all or part of their interests and defer taxation on the gain. And they make it possible for companies to provide an employee benefit simply by contributing tax-deductible shares of their own stock, among other benefits. Broadly granted stock options do not provide special tax benefits but give growing companies a way to compensate employees with equity rather than more cash. Putting company stock in 401(k) plans provides a less expensive way for companies to match employee deferrals than matching in cash. Employee stock purchase plans (often called Section 423 plans, although not all such plans fall under this part of the tax code from which the name derives) allow employees to put aside part of their paychecks to buy stock, usually at a significant discount. Just as important, however, are potential productivity gains. Studies consistently show that when broad employee ownership is combined with a highly participative management style, companies perform much better than they otherwise...
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...they have previous airline experience or not can benefit JetBlue as an organization because many workers that are over the age of 40 have a great work ethic along with great customer service skills as noted by CVS executive, Stephen Wing (Mondy, 2012). This also creates diversity in the workplace which only enhances the organization. The second law identified is Title VII of the Civil Rights Act of 1964 that was amended in 1972. Title VII prohibits an employer from discriminating "in hiring, firing, promoting, compensating, or in terms, conditions, or privileges of employment on the basis of race, color, sex, religion, or national origin" (Mondy, 2012). However, this law also makes it illegal for an employer to retaliate against an employee for taking part "in an investigation, proceeding, or hearing" (Mondy, 2012). While it is important for...
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...Experiential Exercise: For this exercise, I chose to compare the websites of Boeing and Lockheed Martin. Two prominent companies in the aerospace and aviation industry, which is, and will most likely always be, the primary industry I'm employed in. Both companies' websites successfully convey information in a simplified and descriptive manner. With Lockheed Martin, there are navigational links for different levels of employment and experience levels, such as ex-military personnel transitioning into the civilian careers, new college graduates, interns, and experienced professionals. This simplifies the job search into a 'one-click' method in which interested applicants can view the opportunities that are available to their respective experience levels, as well as any further instructions for applying. Boeing, while also having links to different employment levels, seems more focused on communicating information about the company's ethics, history, and products. This field is based on staying on top of new technology and producing goods of exceptional quality, which means there is a . However, at some levels of both companies, there is a cost-leadership strategy in producing goods for the lowest cost and having employees more efficient than the other. Therefore, it appears that both companies are using a combination strategy, and doing so successfully. There seems to be an encouraged strong desire for entry level applicants with both companies, however, there...
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...For many of us, finding a career that we deem fun and long-term is in itself a long journey. But having a successful career in life is not just for the rich and famous, it's also for the average person. We as humans are prone to look at successful individuals like Oprah or Bill Gates and assume that somehow they became wealthy and innovative overnight, but it truly took many years, time, effort, and perseverance. Choosing a career is an involved process that is based on a number of things, including your interests, skills, work-related values, and personality. And of course salary and bonuses take not the last place in our decision. I am doing my MBA program and I have to choose the field in which I will devote my life. I am interested in marketing, finance and HR, that is why I decided to compare these tree fields. The difference in salaries and bonuses are explained by level of responsibilities, PART 1 The difference in salary between International Marketing Manager; Financial Analysis Manager and Human Resources Manager is not so significant, but the field of activities is totally different. It is not surprising that international marketing manager is paid more than others. The median salary for international marketing manager is $101,484; for financial analysis manager is $98,905; for human resources manager $85,863 (10001, NY). In my opinion, in this case the main factor that can explain the difference in the salaries is your responsibilities. PART 2 Benefit...
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...What are the potential effects of this selected structure on employee behavior? * * * We believe that the employee response in this type of structure is much better. As you can see from the slide, we have implemented the best of both worlds. In the manufacturing portion of the process, there is no room for variances so input from other departments is not required. On the assembly line there is a lot more variances possible to get the same job done so input from other departments is required. What we have done is allowed other departments to have input to the process before changes are made instead of after. This enables departments to reap the benefits instead of repercussions of decisions made. * This empowers the employee with the decision that they make. At Riordan manufacturing we have taken it one step further, we offer Employee Stock Options which allows the employee to not only have a better working environment but to reap the financial benefits as well. * * * Identify characteristics of the company’s culture. What are the potential influences of the corporate culture on employee behavior? Company culture is the shared values or norms of an organization. Company culture can differ with in departments within organizations. This determines how employees are to behave or represent the company. This does not mean that they need to like it, just that they understand it. Organizational culture defines it’s self from one organization...
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...Summary 3 Introduction 4 Research Findings 5 Stock Options 5 Tuition Reimbursement 6 Merit Plans 7 Conclusion 8 References 10 Executive Summary In a business the main focus is become as successful as possible. In order to gain success and maintain the success a business must have a reliable and dependable staff. With this being said it is important to compensate employees to maintain and develop the best work performance possible. The success of the business is depended on the employees. Research has been done on three compensation strategies that benefit the employees and company, those three compensation strategies are implementing stock options, tuition reimbursement, and merit plans. Stock options benefits have been known as an attractive way to reward employee performance. It is important for the organization to claim the stock options to be capitalized on the balance sheet so shareholders can track EPS, which in return is beneficial to the organization as well. This compensation benefit has been around for decades and continued to grow until the increase in accounting rules in 2001. With more rules implemented it allows for the companies to maintain a fairness in the workplace. This option should be offered to all employees but is not require for the employee to exercise. The beginning step to be made for the organizations is to determine at what price the employee may purchase stock options at and for what timeframe. Tuition reimbursement...
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...Case 1: Sooner or Later, Inc Background: In this case, Sooner or Later Inc granted 1,000 employee stock options. When the employees still worker in Sooner or Later and the cumulative revenue over the following three year reporting period is greater than $ 10, the award will vest. Question 1: According to the case, Sooner or Later adopted ASC 718, Compensation- Stock Compensation. And ASC 718-10-30-2 says “A share-based payment transaction with employees shall be measured based on the fair value (or in certain situations specified in this Topic, a calculated value or intrinsic value) of the equity instruments issued.” Therefore, the company should use fair value measurement to calculate its compensation cost. The question is that which grant-date fair value should use to measure the company’s compensation cost. In my opinion, the company should use the $9 grant-date fair value. Because the performance conditions which company considered only affect vesting. ASC 718-10-30-27 refers that “Performance or service conditions that affect vesting are not reflected in estimating the fair value of an award at the grant date because those conditions are restrictions that stem from the forfeitability of instruments to which employees have not yet earned the right.” So the revenue target should not be factored into the fair value assessment. Besides, according to ASC 718-10-55-64, “Performance or service conditions that only affect vesting are excluded from the estimate of grant-date...
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