Restricted Shares: The Case for Total Shareholder Return
Introduction
In the wake of adopting FAS 123R some companies have shifted away from stock options toward restricted shares. For many senior executives, however, there are better equity plan alternatives to a pure option plan or a pure restricted share plan or even a combination of the two. Companies that understand some of the alternatives under FAS 123R can make their equity plans more efficient. These companies can better reward high-level employees that perform well and create shareholder value without increasing accounting costs.
Historically, under APB 25 shares that vest based on market-conditions (“market-based” awards) were subject to variable accounting in the U.S. FAS 123R has now eliminated this unfavorable accounting treatment. As a result, companies based in the U.S. are joining those in the U.K. and Continental Europe in recognizing some of the advantages of market-based awards over service-based awards. Time Warner, Pfizer, Campbell Soup, Duke Energy and Viacom among many others are awarding or will be awarding market-based shares as part of long-term incentive plans to senior executives. The number of companies granting market based performance shares will grow as companies seek to better align executive compensation to shareholder returns.
