Question about stock options and executive compensation

[Phoebe Loosinhouse]

Health insurance CEOs get a large part of their compensation from millions in stock options. I believe that they are awarded the stock at a particular price to be exercised by a particular date. I think the stock is essentially free to the exec but they have to pay taxes (although I have read that some companies pay the taxes as well - I think this should be taxed as additional income IMO, but I don't know whether it is or not)

Have I described this process correctly?

How very, very sad it will be if the stock price of health insurers drops and these execs lose paper millions on stock they were given and whose price was driven up by profits propped up by denial of services to their vict. . . oops! I mean customers.

That would be sad, wouldn't it?

[JuniperLea]

1. Not exactly...

They get a percentage discount on the stock. They can still make a killing on the spread. I like how you think, though:)

[AllentownJake]

2. A stock option is an option to purchase a stock at a certain price

that will expire at a certain date. So if an executive is awarded 1000 shares at $45 today, and the stock goes up to $60 in a year they can make $15 per share on the spread of the option. If the price goes down to $30 than the executive will simply not execute the option to purchase the shares.

They are not taxed until the options are executed.

[yodoobo]

3. They are given the opportunity to purchase stack at a fixed price

It works like this

1) They are given a stock option grant of x numbers of shares at y price. y price is determined by the market price on the grant date.

2) At some point in the future, the stock may have risen in price. Lets call that price Z.

3) The holder of the options, may now now purchase x numbers of shares at Y price, and then immediately sell those shares at price Z. Their profit is x*(z-y). They then pay regular income tax (not capital gains tax) on the profit and may use the profit to fund the purchase. They are also required to pay FICA tax on this as well if they have not yet reached their fica max for the year.

4) If the stock declines in price, then they never exercise the options and do not incur any taxes or losses.


Btw, this used to be staple of compensation for high tech companies for regular rank and file employees. However the Bush administration took that away a few years ago, now its once again limited to just executives.

[morillon]

6. Exactly.

When I was still doing the stock option thing a few years ago, I'd execute what's called a cashless trade, which is pocketing the difference between the current street price and the strike price of the options. I never held any stock for longer than the few seconds it took for the cashless trade to go through. I paid taxes on the profit at the time of trade.

But that only worked as long as the stock went up in price. When I left the company a few years ago, I forfeited thousands of vested shares that were underwater with no hope of being worth anything for at least ten years, if then.

I'm back working at that company now (yeah, tough economic times can make for strange bedfellows), and they don't do options anymore. I'm glad, 'cause I felt a lot of ambivalence about the whole thing anyway. I loathe the stock market and want nothing to do with it.

[AldebTX]

4. Are They Taxed

As if its income or are they taxed as if its a Capital gain?

[yodoobo]

8. regular income. including fica, state and local

[Phoebe Loosinhouse]

5. I guess some are compensated outright in stock as well as options

http://en.wikipedia.org/wiki/Executive_compensation

I just worry about the CEOs. I would really hate to see their living standards decline due to the selfishness of people requiring actual care eroding their profits.

[morillon]

7. And some are given high dollar loans...

...that are forgiven a year later.