Time to make the first decision:
“This is the way”
Now, you have a better understanding of the settlement, type of incentive, tax consequences and liquidity. In order to make it even clearer we will demonstrate the impact and timing of the gross benefit, cash-flow need and net benefit of different types of share-based incentives with some graphics. We note that for all types of share awards we apply the same number of awards, i.e. 1,000. However, only for options, we apply factor three as the value of an option is lower than a share, so we used 3,000 options.
As you can see, there is basically no difference between the gross benefit for Restricted Shares, RSUs and ESPPs (it is not visible in the graphic). Only stock options demonstrate a different growth pattern. However, when you look at the net benefit below, you can see that the net benefit is different per type of incentive:
Stock options result in the highest net benefit; however, the share value needs to increase significantly. Furthermore, a stock option will only result in a benefit in case the share value increases. For Restricted Shares the benefit is also relatively high compared to the other incentives. However, the cash-flow impact and the timing of the cash-flow need is also totally different per type of incentives. You can see the differences below:
Now, you have a better understanding of the settlement, type of incentive, tax consequences and liquidity. In order to make it even clearer we will demonstrate the impact and timing of the gross benefit, cash-flow need and net benefit of different types of share-based incentives with some graphics. We note that for all types of share awards we apply the same number of awards, i.e. 1,000. However, only for options, we apply factor three as the value of an option is lower than a share, so we used 3,000 options.
Gross benefit
As you can see, there is basically no difference between the gross benefit for Restricted Shares, RSUs and ESPPs (it is not visible in the graphic). Only stock options demonstrate a different growth pattern. However, when you look at the net benefit below, you can see that the net benefit is different per type of incentive:
Net benefit
Stock options result in the highest net benefit; however, the share value needs to increase significantly. Furthermore, a stock option will only result in a benefit in case the share value increases. For Restricted Shares the benefit is also relatively high compared to the other incentives. However, the cash-flow impact and the timing of the cash-flow need is also totally different per type of incentives. You can see the differences below:
Cash-flow need
For Restricted Shares and ESPPs, the participants immediately need to use their own liquidity. For Restricted Shares, to pay the tax at grant, and for ESPP, the value of the shares. In addition, they also have the risk to lose value or to lose the investment in case the share value decreases, or the company goes bankrupt. Therefore, these types might not be ideal for everyone.
With stock options, you have the highest cash-flow need in this example. However, the cash should be available as the underlying shares are tradeable. If the participant wants to pay tax earlier, that is also possible, but that is no longer necessary based on the Dutch tax rules.
What will it be?
Based on all the information we discussed in this whitepaper so far, it is possible to make a decision on which type of incentive and settlement is the best match for the company at this stage. All relevant elements are known. However, the actual plan design will actually only start now. You can basically compare it with the decision to buy a new car. You know the brand and type, however, you now have to make a decision on a much more detailed level, e.g. which engine, which colour, which tyres, etc. These next choices to make will be described in the next paragraph.