Motivated employees have a significant impact on a bank’s future profits and long-term shareholder value. Equity plans are compensation solutions that banks may offer to select employees that drive this motivation and growth. These plans also help attract and retain key personnel. The plans are structured in a number of ways to address potential concerns of ownership dilution. “Real” equity plans, such as stock options and restricted stock plans, involve issuing stock that dilute ownership. “Synthetic” equity plans, such as stock appreciation rights and phantom stock plans, provide a sense of equity to participants without the issuance of actual stock, thereby eliminating any dilution of ownership to existing shareholders.
REAL EQUITY PLANS
Stock option plans (SOP) allow executives to purchase bank stock at a pre-determined price. There are many alternatives available within this type of plan, and the impact to the bank has to be thoroughly explored. This plan is more widely used with publicly-traded banks rather than closely-held banks.
With restricted stock plans (RSP) the executive is granted shares rather than given the option to purchase shares. Restricted stock plans differ from SOPs in that these grants give executives immediate value at the time of the initial grant, rather than just the future appreciation of the stock. However, along with that immediate value and ownership, the executive inherits an instant risk of loss should the value of the shares decrease.
SYNTHETIC EQUITY PLANS
Phantom stock plans (PSP) issue phantom shares that are granted at the book value or fair market value per share. The duration of the plan may be short-, mid- or long-term and can be incentive based or discretionary. In addition, the plan is not an entitlement; therefore the granting of shares may vary from year to year. When a phantom share is granted, the executive receives the full value of the share. Though the executives are not actual shareholders, they receive the same value as though they were owners. For example, if one share of stock is granted and the book value of the share equals $10 and the book value then grows to $15 at the end of the first year, the value to the executive is $15. The opposite is true if the value of the stock decreases.
Stock appreciation rights plans (SAR) work very similar to the SOPs; however, the executive receives only the increase in the value of synthetic shares from the initial grant value, rather than purchasing actual shares. For example, if the executive is awarded a SAR share valued at $10 that then grows to $15, only $5 would be credited to the executive’s account. The executive has a right to only the growth of the synthetic share rather than the full share value. If the value of the shares decreases below the initial grant value, the value to the executive is zero.