Chapter 19 - Shared-based Compensation & Earnings Per Share

Restricted Stock Plans

Typically tied to continued employment.

Restricted Stock Awards (RSA)

Shares awarded in the name of the employee. (Company might retain physical possession of the shares)

Restricted Stock Awards (RSA)

Employees usually not free to sell the shares during the restriction period, and a statement about those effects often is inscribed on the stock certificates.

Restricted Stock Awards & Restricted Stock Units

Subject to forfeiture by the employee if employment is terminated within some specific number of years from the date of grant.

Restricted Stock Units (RSU)

Right to receive specified number of shares of a company’s stock.

Restricted Stock Units (RSU)

Ex:) Performance bonus, signing bonus, or regular compensation.

Restricted Stock Units (RSU)

Employees do not get stock right away. Shares are distributed as the recipient of RSUs satisfies the vesting requirements. Sometimes given the cash equivalent of the number of shares used to value the RSUs.

Restricted Stock Award (RSA)

Awarded at time of grant.

Restricted Stock Units (RSU)

Not awarded at time of grant.

Stock Options

Employees aren’t actually awarded shares. Given the option to buy shares at a specified exercise price within some number of years from the date of grant.

Employee Share Purchase Plan

Permit all employees to buy shares directly from their company, often at favorable terms.

Employee Share Purchase Plan

No brokerage fees, sometimes at a slight discount.

Employee Share Purchase Plan

Intent is to encourage employee ownership of a company’s shares.

Employee Share Purchase Plan

Loyalty is enhanced.

Employee Share Purchase Plan considered non-compensatory as long as

Substantially all employees can participate.

Employee Share Purchase Plan considered non-compensatory as long as

Employees have no longer than 1 month after the price is fixed to decide whether to participate.

Employee Share Purchase Plan considered non-compensatory as long as

The discount is no greater than 5%

Simple Structure

Structure states that a firm has no potential common shares.

Can Dilute EPS

Convertible bonds, outstanding securities, preferred stock, stock options, contingently issuable shares

To dilute EPS means,

to reduce earnings per share (EPS)

Complex Capital Structure

Structure states that a firm has potential common shares outstanding.

Effect on EPS of the sale of new shares

add to the denominator

Effect on EPS of a stock dividend/split

Multiply % in denominator to dates affected (5% = 1.05)

Effect on EPS of the reacquisition of shares

subtract from the denominator

Effect on EPS of the preferred shares

subtract from the numerator

Effect on EPS of convertible securities

add to the denominator

Basic & Diluted

reported on the face of the income statement for all reporting periods presented in the comparative statements.

EPS only

businesses without potential common shares

Disclosure notes for EPS

1. Reconciliation of the numerator and denominator used in Basic EPS computations

Disclosure notes for EPS

2. Computations to the numerator and the denominator used in Diluted EPS

Disclosure notes for EPS

3. Adjustment to the numerator for preferred dividends.

Disclosure notes for EPS

4. Potential common shares that weren’t included because they were anti dilutive.

Disclosure notes for EPS

5. Transactions that occurred after the end of the most recent period that would materially affect EPS.