Non-Qualified Stock Options (NQSOs)

Key Provisions

• Employee may buy stock at a specified price for a given period of time, typically ten years
• Appreciation from grant date to exercise date taxed at ordinary income tax rates
• Option price may be below Fair Market Value
• Offer to purchase stock at a specified price, for a given time period.
• Tremendous flexibility in design of option plan.
• Does not satisfy conditions of IRS Code for preferential tax treatment.

Tax Impact on Employee

• At grant - no tax
• At exercise - appreciation from grant price taxed as ordinary income
• At sale - capital gains treatment on additional appreciation from date of exercise
• Total tax liability varies depending on tax bracket and state.
• Pay tax if grant price is lower than FMV.
• If options are discounted, difference is a payroll tax.

Tax Impact on Company

• At grant - no tax deduction
• At exercise - company receives tax deduction equal to employee's ordinary income
• At sale - no tax deduction
• Company takes accounting charge to earnings on difference if option price below Fair Market Value

Advantages

• No charge to earnings (unless below Fair Market Value)
• Company receives tax deduction
• Long exercise period allows executive flexibility and can be retentive
• No limitations on the amount that may be exercised
• To compensate and incentivize employees.
• Provide tangible awards without using liquid resources.
• Opportunity to share in the future growth of the Company.

Disadvantages

• Executive investment required
• Executive incurs tax liability at exercise
• Dilutes EPS

Capital Gains Tax

• If stock held for less than a year, the tax rate is 28%.
• If stock held for more than one year, the rate will be 20%.

What does this mean for The COMPANY?

• The COMPANY can provide employees with an opportunity to share in the future success they help generate.
• NQSOs provide flexibility in Plan design, and can be tailored to meet organizational needs.
• The COMPANY has freedom in setting the option strike price and identifying participants.
• The COMPANY receives a tax deduction on stock appreciation over strike price upon exercise.

KEY PROVISIONS	TAX IMPACT ON EMPLOYEE	TAX IMPACT ON COMPANY	ADVANTAGES	DISADVANTAGES
Employee may buy stock at a specified price for a given period of time, typically ten years Appreciation from grant date to exercise date taxed at ordinary income tax rates Option price may be below FMV	At grant - no tax At exercise - appreciation from grant price taxed as ordinary income At sale - capital gains treatment on additional appreciation from date of exercise	At grant - no tax deduction At exercise - Company receives tax deduction equal to employee's ordinary income At sale - no tax deduction Company takes accounting charge to earnings on difference if option price below FMV	No charge to earnings (unless below FMV) Company receives tax deduction Long exercise period allows employee flexibility and can be retentive No limitations on the amount that may be exercised Less dilutive than ISOs	Employee investment required Employee incurs tax liability at exercise Dilutes EPS

To find out more on how Compensation Resources, Inc. can help your company with Non-Qualified Stock Options (NQSOs), please contact us or call us directly to speak with our compensation consultants at 877-934-0505.