Employee Long Term Incentives - Share Schemes explained

Share Schemes 

Full Value Shares

Full Value Shares are granted up front as part of the employees compensation plan, but are not owned outright until the agreed vesting period is reached.

At the vesting date, the recipient is paid the full current value of the share.

For example – Miss A is allocated 100 shares in 2010 valued at R10 per share. When the shares vest in 2014 they have reached a price of R25 per share.
Miss A is paid 100 x R25.

Similarly, should the share have lost value, the recipient will receive whatever the reduced value of the share is.

Financial benefit/risk to recipient
Whether there is gain or loss, the recipient still receives whatever the share is worth.

Restricted Shares

Restricted Shares are granted up front as part of the employees compensation plan, but are not owned outright until the agreed vesting period is reached.

Similar to Full Value Shares, recipients will receive the full current value of the share on vesting.

The main difference being that Restricted Shares are ‘restricted’ in terms of when they vest and usually limit or exclude the shareholder from voting rights or dividend participation.

On vesting, the recipient owns the shares outright.

Restricted shares may be forfeited in certain circumstances e.g. leaving the company/termination or failing to meet set performance criteria. However these restrictions usually fall away once the vesting period is reached.

Performance Shares

Allocations of Performance Shares are usually linked to the achievement of specific performance targets, rather than issued as part of a standard compensation plan. They are used as equity compensation for outstanding executive performance.

These shares also have vesting periods, which sometimes include further time-vesting restrictions linked to continued employment periods and the achievement of set earnings-per-share growth.

On vesting, the recipient owns the shares outright.

Performance Shares can be implemented as Full Value Shares or as SARS/Options.

Financial benefit/risk to recipient
Should corporate performance goals not be met by the vesting date, Performance Shares may expire or be cancelled entirely.

Share Options

Share Options are granted up front as part of the employees compensation plan, but are not accessed until the agreed vesting period is reached.

Once Share Options vest the recipient benefits only from any profit/growth the shares may have experienced since the date of the allocation – minus the original price of the share.

Financial benefit/risk to recipient
The risk associated with Share Options is poor share performance. Should the value drop to the original allocation price, or lower, then all practical rand value to the recipient is lost, as the profit element has disappeared.

Stock Appreciation Rights
(SARs, SSARs & CSARs)

Similar to Share Options, SARS gain value if the company share price rises, or lose value if the share price drops.

A stock-settled SAR (SSAR) has a vesting period and an extended expiration date. It pays out the appreciation on vesting in the form of stock (shares). The recipient has the option of keeping the stock or selling it for cash.
If the SSAR is not exercised before the expiration date they expire with no value.

A cash-settled SAR (CSAR) also has a vesting period and extended expiration date. It pays out the appreciation in the form of cash on vesting.

Phantom Share Schemes

A Phantom Share is part of a scheme designed to mimic the performance of shares in a company, without giving employees company shares. Sometimes referred to as ‘shadow stock’.

Even though the Phantom Shares are not real, they follow the price movement of the company’s actual stock and pay out any resulting profit, minus the original value of the share price when it was allocated.

The benefit to the company is that existing shareholders do not have their actual share numbers diluted.