Stock option plan (American laws based on) (a)

Overview, stock option plan
Stock option plan originally was the right to choose managers in a certain period of time to determine the price of company to buy a certain number of shares of the company, namely the cost for a future time, according to the agreed price, to buy (or sell) a certain amount of stock rights. Before exercise was awarded the man didn't have any cash, between the market price and the exercise price after discount is awarded the option income people get. In view of the future stock prices may also downward fluctuation, therefore, the right of option's exercise can also give up in the future, thereby reducing the risk of the stock may be caused by the direct ownership, but also will benefit and equity managers future prices will be the future performance of the company together. The option to attract and effectively motivate managers for a long time, as far as possible to make the long-term interests of the company and the shareholders of target and the behavior of managers keep consistent. After decades of development, the stock option plan now has become a series of institutional arrangements, including managers and employees to share the ownership of enterprises and the future earnings power enterprise owners. In other words, it has evolved into a broad concept and formed a set of complex system, including all the staff incentive purposes, according to different levels, different scope, different types of employees and the development of different incentive plan. In America, besides the incentive stock option is the most common and non statutory stock options outside, also includes negotiable stock option (TSO), stock appreciation right (SAR), virtual stock plan, non restricted stock grant programs, restricted stock grant programs and employee stock ownership plan (ESOP).
From the definition of the stock option can be seen, it is essentially the owners a long-term incentive system for managers, stakeholders and the staff, the owner of the objective is to use a long-term potential benefits of employee motivation in enterprise especially the maximum target and shareholder senior managers of the operators and the consistent to ensure the sustainable growth in enterprise value. Needless to say, the stock option plan under the condition of market economy is an effective manner of compensation and incentive tools, it is to adjust the income structure of employees, the stability of the enterprise backbone troop, the managers focus on the long-term performance of enterprises have a role that can not be ignored. Research shows that the optimal incentive mechanism, mechanism of enterprise is actually the "residual claim" and "control" of the corresponding maximum, optimum arrangement must be surplus sharing between a manager and shareholders. Based on this theory, because it can make the stock option plan have control of the managers have residual claim right and assume the corresponding risks, so as to effectively prevent manager's short-term behavior and moral behavior. Stock option plan for managers have long, high intensity of incentive effect, therefore, is widely used in some developed countries to American led.
Stock option is not a direct, clear quantitative compensation, but a manager compensation is realized and the number of linked to enterprise performance of long-term incentive means. Compared with other compensation program, the stock option plan benefits can be divided into two parts, the difference between the fair value gains -- the exercise price and the exercise date stock; capital gains right after the sale, and the two part of the proceeds are dependent on the company's share price rise in long period. Another professor Geoffrey • Libiman cooperation of Harvard School of management professor Briand, Hal and Kennedy of Harvard, the option valuation methods, the relationship between the America twentieth Century 80's and early 90's executive compensation and 478 large stock price is tested. The conclusion is that stock option plan and the interests of shareholders closely, far beyond the traditional salary form and shareholders pay bonuses.
The company plans to list in USA securities market, this paper is based on the law of USA and is not Chinese laws to explain how to operate the stock option plan. Also, data from the survey of reference in this report also originates from the Usa Inc America (according to the National Center for employee ownership in 1998 and 1999 on the Usa Inc stock option incentive survey information, the investigation of the company are widely distributed in various regions, industries, American various scale, can be said that, the results of the survey reveal the Usa Inc stock option incentive the overall situation).

Two, what type of option?
To provide the employee stock option what type, usually the first problems encountered when designing stock option. There are two main types of options can be used: the incentive stock options (ISO) and non standard stock options (NQSO). 422 the provisions USA tax only meet the following basic conditions is incentive stock option:
The 1 gift is the only object of company employees;
2 employees must be right, at least one year after the stock holding, and two years from the grant date;
The 3 annual quota of $100000 for each exercise;
The exercise price of not less than 4 of the company stock price gift day;
5 stock options may not be transferred, unless by will transfer to the successor;
6 stock option grant programs must be a written plan, in the implementation of the program 12 months 12 months before or after, must get approval by shareholders' general meeting, and plans in the 10 years after the implementation of the completed within;
The exercise period of 7 stock options from the grant date is valid for 10 years;
8 have more than 10% of the voting rights of employees to accept incentive stock options, the exercise price must be higher than 110% gift, the stock price, and must be in the 5 years after the exercise.
Stock option does not satisfy all of the above conditions, called non standard stock options. At present, there is no legal regulation of non - standard stock option.
For the incentive stock options:
1 of its authorized person is only limited to the staff, so the incentive stock option plan can only be used to attract, retain and motivate employees, is a simple means of incentive, and can not be used as a means of payment and settlement, for external transactions payment settlement, for example, as the payment to the consultant;
2 the price of not less than the grant date fair market value of the stock, therefore, the incentive stock option value, the existence of time value (American stock market from the perspective of history, about every 7 years, the stock price doubled). Option value employees are obtained, and the development of the company and the company's share price is closely linked, the emphasis is on the future of the incentive, rather than on past returns;
3 incentive stock option plan has a statutory holding period, which can be used to establish a culture of enterprise ownership, establish employee ownership;
4 USA 1950 tax law: every option price is equal to or greater than the grant price on the stock market in 95%, purchased by the managers or resale option after the stock yield are classified as capital gains, and capital gains tax levy according to the appropriate tax. And the staff at the grant date, the right day, exercise daily need not pay tax, have deferred tax benefits, correspondingly, companies do not have access to the related tax deductions;
5 because of the incentive stock options to satisfy the legal requirements, the relevant reports, records management is very cumbersome, and therefore such option plan management is very difficult. Usually only applies to technical personnel authorized by a senior management staff, the. Authorization number is limited, to ensure that the project management it is not complicated, otherwise the cost will be very high.
For non standard stock options:
Not restricted to authorized person for 1;
2 the exercise price, not subject to federal income tax law constraints, such as the exercise price is lower than the grant date stock fair market value, discount compensation expense part of belonging to the company, can be amortized in the option plan within the period of validity.
3 licensees in the grant date without the tax, but the tax on the vesting date, and sold at a stock, should also pay capital gains tax. If the sale date from the exercise of days in a year of above, so authorized by the long-term capital gains tax rate.
4 it can use a variety of exercise way, exercise, such as cash, stock exchange, the sold loans to exercise, so that employees have more choice.
It can be used on the same day sold 5 way, immediately sold in the exercise price to obtain payment after the stock, therefore, employees can immediately realized his income.
Note: considering the company management personnel in the United States may tax situation, the difference of individual income tax and capital gains tax was not significant (the higher the income the difference is more obvious, because of the capital gains tax rate is fixed, while the general income tax is a progressive tax rate).

Table 1: provide stock option type of employee
Managers and non managers
Only 28% ISO 20%
Only 44% NQSO 38%
At the same time provide 42% 28%

Three, the distribution of stock option
Distribution of stock option in the grant of the object, in principle is the basis for the company's contribution, which requires companies look at the existing performance evaluation system. Can say, the performance evaluation and distribution policy reasonable and effective stock option plan for success of the core.
The 80% companies not only for managers, also provide stock option reward continuous non managers, not just a one-time allocation;
That generally speaking, the manager, assigned to the senior managers value than low level managers, in non managers, professional and technical personnel assigned to the value is higher than that of administrative personnel;
The stock options granted in recent years, from all the survey firm was average, managers receive part accounted for 55%, but in the number of employees more than 10000 people, managers are part of the average accounted for 71%;
The stock option spread income, average equivalent to wage income staff years of 12% - 20%, the amount of employees and employee stock ownership plans from the amount of equity.