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Some Important Jargons That You May Come Across While Reading Your Employment Contract

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Non-Statutory Stock Options. These options are called "non- statutory," because there are essentially no legal requirements as to their issuance other than those resulting from state and security laws. You pay income tax on your profits when the options are exercised. Nonstatutory stock options are, however, attractive in other ways. Price needn't be 100% of market value, so they can be granted at below-market prices...for example, at or below book value, at some fraction of market value, or even at $1 (or less) per share. There's also no limit on how many options may be granted; exercise can be sooner than two years after granting; and there's no need to hold the stock for any particular period after exercise. However, unlike ISOs, you pay income tax on your profits...the difference between what you pay and the fair market value of the stock on the day you exercise your option and buy the stock.

Company Stock with Non-Lapse Restrictions. The company can also grant you stock with a restriction that states that it never lapses, and that you or your estate have to sell the stock back to the company whenever you leave at a price calculated according to a formula established when the stock is granted to you. The formula for the repurchase price must be reasonable...perhaps, for example, book value, plus a multiple of earnings. Here again we have an arrangement that can be used to attract a new employee, who hasn't yet proven how valuable he or she may turn out to be. We also have an arrangement-often used by privately owned companies-that will assure that the current owners of the company will remain forever in control. Obviously, under this sort of an arrangement you are never going to get capital gains tax treatment on the money you get when "your" stock is "repurchased." However, this can be an excellent way to make you legitimately feel-for the time you're there-a "part owner" of what is and may always be a family company.

Phantom Stock Options. This is another device nonpublic companies may use as incentive compensation. Unlike restricted stock with restrictions that never lapse (stock which the company can "buy back" from you), phantom stock options technically aren't stock and aren't options. They are merely the grant of a promise to pay you money in the future according to a formula based on the increasing value of the underlying stock, which you do not and never will own. Although the amount of money you may get is defined by growth in the value of the underlying stock, you personally may have to meet time and performance criteria to get it. This is an unfunded and unsecured obligation, which does not escape creditors if the company goes bankrupt. Any money you get on this arrangement will be taxed as ordinary income when you get the cash.

Stock Appreciation Rights (SARs). The SAR is a hypothetical unit linked in value to the rising value of the company's stock (if public) or a formula (if the company is privately owned). Value can decrease with the declining value of the stock, but not below the value of the stock (or formula) at the time of grant. The granting of nonstatutory stock options may be accompanied with the granting of SARs-called a tandem grant-in which case the SARs mature simultaneously with the exercise of the accompanying stock options and provide an amount of cash that pays or helps pay the income tax due upon the exercise of the options. There's more complexity here than we can cover together. However, as you would expect, money you get from SARs is subject to income tax...and indeed FICA as well.

Phantom Stock Plan. The stock is hypothetical "shares," not actual shares, and the actual value of the dollar amount originally granted goes up and down with the value of the underlying stock. If the underlying stock splits or dividends are paid, the dollar account is credited with any incremental value, and the actual total value is paid when the individual is terminated, retires or dies. There's no tax consequence at the time of the grant, but when the distribution occurs it is subject to income tax and FICA.

Performance Units / Performance Shares. Here a program is devised to encourage the meeting of long-term performance goals by the overall company. Measurements can be in units (a dollar amount) or tied to the value of a share of stock. Programs can be whatever the company designs them to be, but to earn 100% of the amount targeted to be paid at the end of the program the compounded growth performance during the period has to be X%. Performance at 90% of goal might earn a lesser amount at the end of the period. Lower performance might earn correspondingly even less at the end...or perhaps nothing, depending on the plan's terms. Payment at the end can be in dollars or stock or a combination or as chosen by the employee according to whatever leeway was written into the plan when it was established. But-no surprise-when payment is due, ordinary income and FICA taxes apply.

Performance Cash Plan. Similar to Performance Unit and Performance Share plans, but often with a shorter duration until the proceeds are paid. Since performance of the company's shares doesn't have any role in determining how much will be paid, the company knows it will not have to pay more than a certain amount at the end of the term. Taxed, of course, as income when paid.

Deferred Compensation. Many highly paid executives have historically preferred to defer some of their current pretax income for payment after retirement...or on some other agreed-upon date. These arrangements, called "nonqualified deferred compensation plans," allow you to defer payment of taxes until the income is actually received, when you may be in a lower bracket. However, income tax rates fluctuate. Recognize that, if you participate in your new employer's deferral plan, you may actually be moving income into a higher future tax bracket than the one you're deferring it out of now.

Also, if you're participating now in your current employer's plan, be careful to find out what happens to your deferred compensation accounts when you quit. These plans almost invariably change the payout rules upon termination, and the amount of interest you receive often changes, too. Also keep in mind that the amounts you receive from a nonqualified plan are subject to current income tax at ordinary rates, and cannot be rolled over to an IRA or to another company's plan.

Interest-Free or Low-Interest Loans. If you get a loan from your employer at a considerably lower rate than any other lender would provide, the IRS will want to tax you on what you're saving. And your employer may insist that the loan becomes due if you try to leave...a form of "Golden Handcuff." You're probably better off getting her to strong-arm a bank into loaning you the money.

"Golden Handcuffs." This term covers any compensation program that makes it costly for you to leave the company. Various options, stock appreciation, and incentive compensation schemes make you stick around in future years to get the benefit of what's "granted" now.

"Golden Parachute." Any compensation arrangement that generously takes care of you, if you're thrown out or demoted because of a corporate merger or takeover is covered by this broad and colorful term. You have to be a very senior corporate officer to get a "parachute." But you'll probably land ever so softly in the lap of luxury, with one to five years of your highest-ever base-plus-bonus annual compensation (your choice of lump-sum or continuation payments), immediate vesting of all "granted" stock, immediate exercisability of all options, immediate payment of all performance-contingent sums under incentive programs, immediate vesting of your pension benefits, and continuation of your company-paid medical and life insurance for the same duration as your compensation, or until you join another corporation full-time.
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