InfoWave Knowledgeware

This article highlights the major implications to the financial results of the three most common equity compensation schemes, namely share option scheme, performance shares scheme, and Share Appreciation Rights (SAR, also known as phantom share scheme).

Key Characteristics

The key characteristics of each scheme are as follows:

Share option scheme

• The company grants employees the right to subscribe for new shares in the company at a fixed price.
• Employees are required to pay the company the exercise price in consideration for the shares.
• Employees can generally only exercise the right after remaining in service with the company for a period of time and/or after meeting certain performance targets.
• The right would generally expire after a period of 5 to 10 years from the date of the grant.

Performance share scheme

• The company grants employees shares in the company.
• Employees will generally receive the shares, at no cost, after remaining in service with the company for a period of time and/or after meeting certain performance targets.

Share Appreciation Rights

• Similar to the share option scheme except that:
  Upon exercise of the option, the employees do not pay the exercise price to the company nor receive the shares; instead, they are paid the difference between the exercise price and the market price of the shares in cash.

While all three schemes require the use of fair values of the share options or shares for the recognition of the compensation expense over the vesting period, the impact on the company’s financial position and financial results is different.