Presented on 11/21 by Eric Duffee and Randy Gerber, Founder and Principal of Gerber LLC, as part of a four part series. This segment of the series covered equity-based employee incentives. It offered a clear description as to what they are, why companies use them, as well as some things to consider. Randy and Eric showcased a variety of examples along with a few alternatives in regard to compensation.

2. Equity-Based
EMPLOYEE INCENTIVES

3. WHAT ARE
THEY?

4. Compensation tied to
equity value
Actual equity
“Synthetic equity”

5. WHY DO
COMPANIES USE
THEM?

6. Attempt to align employee
incentives with owner incentives
Provide additional compensation
to attract and retain quality
talent when cash is scarce
Use of vesting/forfeiture as
retention tool

7. WHAT ARE THE
CONSIDERATIONS?

8. Effect
On Owner
Employee
Behavior
Tax
Impact
Employee
Cost

9. WHAT ARE THE
OPTIONS?

10. Incentive stock options
Nonqualified stock options
Equity grants
Restricted equity
Profits interests
(tax partnerships only)
Actual Equity

11. Phantom stock
SARs
Synthetic Equity

12. EXAMPLE

13. Mr. Burns wants to grant an equity award to
Smithers to help incentivize him to build
profitability at the Springfield Nuclear Power Plant.
He decides to give Smithers 10% of the company.
How should he do it?
Example:
Mr. Burns wants
to grant an
equity award to
Smithers

14. Incentive stock option (if corporation):
Smithers pays the fair market value at the time of
grant in order to exercise the option
No tax at time of grant
No tax at time of exercise
Capital gains upon ultimate sale (assuming
waiting periods are met)
Example:
Mr. Burns wants
to grant an
equity award to
Smithers

15. Nonqualified stock option:
Smithers pays the fair market value at the time of
grant in order to exercise the option
No tax (generally) at time of grant
Taxed at ordinary income rates at the time of
exercise
Capital gains upon ultimate sale (assuming
waiting periods are met)
Example:
Mr. Burns wants
to grant an
equity award to
Smithers

16. Equity grant:
Smithers pays nothing for the stock
Taxed at ordinary income rates on the full value of
the stock
Capital gains upon ultimate sale (assuming
waiting periods are met)
Example:
Mr. Burns wants
to grant an
equity award to
Smithers

17. Restricted equity—
vests 25% per year over 4 years:
Smithers pays nothing for the stock
Smithers is taxed at ordinary income rates on 25%
of the value each year
Capital gains upon ultimate sale (assuming
waiting periods are met)
Example:
Mr. Burns wants
to grant an
equity award to
Smithers

18. Profits interest (if partnership):
Smithers pays nothing for the equity
Smithers is not taxed at the time of grant or at
vesting
But Smithers only receives 10% of future
appreciation in the equity, not any of the existing
equity value
Capital gains upon ultimate sale (assuming
waiting periods are met)
Example:
Mr. Burns wants
to grant an
equity award to
Smithers

19. Phantom stock:
No cost to Smithers
Smithers receives cash payment equal to 10% of
the outstanding company stock
Taxed entirely at ordinary income rates
Not paid unless/until directed in the agreement
No rights as an equity owner
Example:
Mr. Burns wants
to grant an
equity award to
Smithers

20. SAR:
No cost to Smithers
Smithers receives cash payment equal to 10% of
the future appreciation in the equity, but nothing
for current equity value
Taxed entirely at ordinary income rates
Not paid unless/until directed in the agreement
No rights as an equity owner
Example:
Mr. Burns wants
to grant an
equity award to
Smithers

21. DO THEY
WORK?

22. WHAT ARE THE
ALTERNATIVES?

23. Salary
Bonuses/
Incentive
Compensation
Deferred
Compensation

24. Eric D. Duffee
Kegler Brown Hill + Ritter
eduffee@keglerbrown.com
keglerbrown.com/duffee
614-462-5433
Investment advisory services offered through Gerber, LLC. Gerber, LLC is not a registered broker/dealer
and is independent of Raymond James Financial Services, Inc. Securities offered through Raymond
James Financial Services, Inc. Member FINRA/SIPC. Raymond James is not affiliated with and does not
endorse the opinions or services of Todd Kemmerer, JR Kern, Capitol Equities, or their respective
representatives. Randall Gerber is a registered representative with Raymond James Financial Services.
Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice
on tax issues, these matters should be discussed with the appropriate professional.
Randall T. Gerber
Founder, Gerber LLC/ Lead Advisor, RJFS
randall.gerber@gerberclarity.com
gerberclarity.com/randy-gerber
614-431-4343