With a myriad of terms and concepts to understand in the realm of share-based compensation, we here at ShareForce have created a comprehensive glossary on the terminology commonly encountered in the world of employee incentives and equity compensation.
Award
An entitlement given to employees, often in the form of shares or options, as part of a compensation package, which can include shares, options, or other forms of share-based payments. It may also be referred to as a “grant” or “reward”.
Award election
The decision made by the employee regarding the type of awards they wish to receive under a share plan.
Bad leaver
An employee who leaves a company under circumstances that do not entitle them to retain their vested options or shares (typically result in the forfeiture of unvested awards).
Broker
An individual or firm that acts as an intermediary in financial transactions (such as trades) between an investor and a securities exchange.
Brokerage costs
Fees charged by a broker for executing transactions or providing specialised services.
Broker integration
Seamless interaction with brokers for the management of trade information, transactions, and payments.
Bulk release
The release of a large number of vested shares or options at one time.
Bulk vesting
A vesting schedule in which a large number of shares or options vest at once instead of gradually.
Capital gains
The profit from the sale of shares or other investments, important for understanding the tax implications of exercising and selling share-based awards.
Cash-settled
Share-based payments where the employee receives a cash payment based on the share price at the time of settlement.
Cliff vesting
A type of vesting where all benefits become fully vested at a specific point in time rather than gradually.
Closed trading periods
Also referred to as “Blackout Periods”, the times when employees are not permitted to trade company shares, often around financial reporting dates.
Conditional award
A grant of shares or share options that is subject to certain conditions being met before they vest.
Corporate performance targets
Target levels or targeted growth in the company-specific financial metrics (e.g. HEPS, EBITDA).
Deferred compensation
A portion of an employee’s income that is paid out at a later date, often used in long-term incentive plans to align employees’ interests with the long-term goals of the company.
Dividend equivalent
Payments made to share plan option holders when the cash value of dividends is converted to additional shares.
Dividends
A portion of a company’s earnings distributed to shareholders.
Embargo
A temporary restriction or ban on trading company shares.
Equity-settled
Share-based transactions where employees receive benefits from their incentives through shares in the company as part of compensation.
Equity award
A grant made to an employee in the form of shares or share options that provides the employee with an ownership interest in the company.
ESOPs
Employee share option plans that provide employees with ownership of shares in their employing company. They are intended to align employee objectives with shareholder interests.
Exercise
The act of purchasing shares in the issuing company’s equity at the agreed price or no price (exercise price) under an incentive plan.
Exercise election
The choice an employee makes to purchase shares or options when they become exercisable. This choice may include the ability to sell enough shares to cover tax obligations but will depend on the company’s offering.
Exercise instruction
An order is given to execute the purchase or sale of shares under the terms of an option.
Exercisable
Refers to options that have vested and can be converted into shares.
Expiry
The date on which an option or right to purchase shares is no longer valid.
Employee portal
A platform for employees to access and manage their awards, including viewing, accepting, and exercising awards.
Fair Market Value (FMV)
The value of a company’s stock determined by the open market, used to set the price for the issuance of shares in share-based transactions.
Forfeiture conditions
Conditions under which awards may be forfeited, such as termination of employment under certain circumstances.
Good leaver
An employee who leaves a company for reasons considered justified or acceptable under a share plan, often retaining some or all vesting rights.
Grant date
The date on which an award is offered to an employee, marking the start of the vesting period.
Grant agreement
The document detailing the terms and conditions of a share-based award, including any vesting criteria, exercise price, and expiration dates.
In-flight vesting
Awards that are midway through a vesting period (prior to vesting).
Integration
The process of combining different systems or processes to work together effectively.
IFRS 2
An International Financial Reporting Standard promulgated by the International Accounting Standards Board (IASB) that provides guidance on accounting for share-based payment transactions. It requires an entity to recognise share-based payment transactions (such as granted shares, share options, or share appreciation rights) in its financial statements, including transactions with employees or other parties to be settled in the entity’s equity instruments, cash, or other assets.
Also Read: “How to Make Complying With IFRS 2 Easier For Share-Based Payments”
Lapse
The termination or expiration of an option or share plan without exercise, often due to participant inaction.
LTIs
Long-term Incentives (plans) designed to reward employees over a longer period, typically more than three years, based on company performance and potentially individual performance.
Lock-in period
A time frame during which employees are not allowed to sell or transfer the shares they have acquired through an incentive plan.
No-fault leaver
An employee who leaves a company for reasons not attributed to their fault and may retain certain benefits, depending on the rules of a plan provided by the issuing company.
Market vesting condition
Performance conditions based on the market price of the company’s equity instruments.
Monte Carlo simulation
A statistical method used in calculating the probability of an event. The formula used in the Monte Carlo Simulation is used to estimate future share prices through a process called Geometric Brownian Motion.
Find out how complex share incentives can be valued using the Monte Carlo Method
Non-market vesting condition
Performance targets unrelated to the market price of the company’s equity instruments.
Participant
An employee or other party eligible to receive benefits under a company share plan.
Participant-initiated trade
An action taken by an employee or plan participant to buy or sell shares according to the rules of a share plan once awards have vested.
Plan administration
The maintenance of award data and participant information, along with communication with participants.
Plan design
The process of designing, testing, and performing fair value and vesting calculations for incentive schemes.
Performance-based awards
Share-based awards that require the achievement of specific performance conditions beyond continued employment (e.g., hitting revenue targets or EBITDA milestones) before they vest.
Performance conditions
Requirements that must be fulfilled for awards to become exercisable, including retention and performance conditions. These criteria determine the vesting of the awards and can be market or non-market conditions.
Performance period
The period over which the performance conditions are measured. These are not always perfectly aligned with the vesting period and may, for instance, align with financial year-end periods.
Participant rights
Additional rights granted to participants, such as pre-vesting dividends.
Performance share awards
Incentive awards that vest based on the achievement of specified performance conditions.
Prorate vesting
Adjusting the number of shares that vest based on a partial period of service.
Restricted period
A set period during which specific restrictions are placed on the shares or options granted to employees.
Restricted Share Units (RSUs)
Awards of company stock that are granted contingent upon certain conditions, typically involving vesting requirements.
Settlement method
The method by which awards are settled, either in cash or shares or a combination of the two.
Strike price
The price at which participants can purchase shares upon exercising their options. Also referred to as the “allocation price” or “purchase price,” it is payable by the participant at that time of exercise to obtain an appreciation of the share price above the allocation price.
Settlement
The process of fulfilling the terms of a contract, typically involving the transfer of securities (stock or equity) or cash.
Share buyback
A company’s repurchase of its own shares from the marketplace, reducing the number of outstanding shares. This can impact the value of share-based incentives by potentially increasing the stock price.
Straight-through processing
A method used in selling or purchasing shares that speeds up transaction processing by eliminating manual intervention.
STIs
Short-term Incentives in the form of variable pay determined annually based on performance for the current financial year, usually settled soon after year-end. They are also known as bonuses.
Time-based awards
These are share-based awards that vest solely based on the passage of time, often requiring the employee to remain employed by the company for a certain period.
Transfer shares
The act of moving share ownership from one individual or entity to another.
Total Shareholder Return (TSR)
A measure of the total returns of a stock to an investor, considering both capital gains and dividends and other corporate actions.
See how Total Shareholder Return is used as a common performance metric for share incentives
Vesting
The process by which an employee earns the right to receive certain benefits from an employer’s incentive plan. Initially, the rights to these benefits are conditional and do not fully belong to the employee. Over time, based on continued employment or meeting specific performance targets, these rights become non-forfeitable. Once vested, the employee is entitled to the benefits regardless of their employment status with the employer in the future.
Vesting period
The period over which an employee must remain employed and/or meet certain performance criteria before becoming entitled to receive or exercise awards.
Read “Vesting Process Optimization: A Comprehensive Guide to Implementing Technology to Improve Efficiency”
Withholding tax
Obligations related to the income tax that must be withheld and reported by the employer when share-based compensation is granted, vests, or is exercised.
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