This comprehensive guidebook serves as a toolkit for designing and implementing a broad-based employee stock option plan from the ground up. It covers the history of stock options, pertinent terminology, building a business case, drawing up a plan document, communicating and administering the plan, and addressing potential problems. Colorful case studies, relevant forms and a glossary of terms augment the text.

“This is a very comprehensive manual that will be of value to every human resources practitioner. It covers the waterfront, from explaining Black-Scholes formula to reporting on actual case studies of today’s premier stock-granting companies.”
- Mark Englizian, CCP, Director, Compensation and Stock Planning, Microsoft Corp.

"An absolute must-read book for all professionals dealing with equity compensation programs, especially in human resources, finance and legal departments."
- Brent Longnecker, CCP, CBP, Executive Vice President, Resources Connection Inc.

Introduction: Total Rewards and Tools of the Trade

1. The Nuts and Bolts of Broad-based Stock Option Plans 1

• What Are Stock Options?
• How Do Options Work?
• Explaining the Options
• Types of Stock Options
• ISO Tax Implications
• ISO Tax Example
• NQSO Tax Implications
• NQSO Tax Example

2. Laying a Foundation 17

• The History of Stock Options
• Prevalence of Plans
• Public Companies

3. Building a Business Case for Broad-based Stock Options 35

• Why Grant Stock Options?
• Is Your Company Ready?
• Involvement
• Rewards and Recognition
• Communication and Business Literacy

4. How Other Companies Hit the Nail on the Head 57

• Everybody's Doing It
• Case Study: How Starbucks Did It
• Steps to Creating Value

5. Estimating Construction Costs 67

• Economic Costs
• Implementation Costs
• Opportunity Cost: Comparing Alternatives
• Communication Costs
• Administration Costs
• The Black-Scholes Pricing Formula

6. Erecting a Framework 83

• Who Gets Them? Allocating Option Grants in the Employee Population
• Setting the Grant Price
• Selling the Shares
• Plan Differentiation
• Participation
• Go Global! Multinational Considerations
• Legal and Taxation Issues
• Plan Types
• Implementation
• Timing the Plan Implementation
• Factors for Early Implementation
• Factors for Later Implementation

7. Brick by Brick:The Nitty Gritty of Granting Options 111

• Overhang and Dilution
• Size of Grant -- Number of Shares

8. Drawing Up the Final Blueprint 121

• Establishing a Stock Option Plan Document
• Required Approvals for Stock Option Grants
• Grant Agreement
• Vesting Schedule
• Term
• Granting Options -- Policies and Procedures
• Exercisability
• Notice of Exercise
• Method of Payment
• Cash Exercises
• Stock Swaps
• Reload Stock Options
• Brokers' Same-Day Sale Exercises
• Cashless Exercise
• Promissory Notes
• Withholding Taxes
• Trading Shares for Taxes
• Exercise Restrictions
• Exercise of Unvested Shares
• Exercise Confirmation

9. Putting the Support Beams in Place 139

• Recordkeeping and Reporting
• Designing the Stock Option Plan
• Hiring an Outside Contractor
• Record Keeping: Measuring for Accuracy
• Reporting
• In-house Administration
• Electronic Record Keeping
• Electronic Disposition
• Outsourcing as an Option

10. Communicating the Plan to Employees 155

• Communication Tips
• What to Communicate
• How to Communicate
• Communications Checklist
• Educating Employees Electronically
• Communicating Electronically
• Other Communication Alternatives
• Communication Overload

11. Repairing Structural Problems -- Patching the Cracks 167

• Stocks Always Rise, Don't They?
• Underwater Stock Options
• Interpretation No. 44
• Alternatives to Repricing
• Keeping Underwater Stock Options Afloat

Final Inspection 201

Sample Nonqualified Stock Option Agreement 207

Sample Forms 219

Glossary of Terms 223

Selected References 235