Guidelines for implementing a stock-option plan for all employees.
As chief executive of Research Frontiers, based in Woodbury, N.Y., Robert L. Saxe offers a stock-option plan that's unusual because it covers all employees. "This company is not a class society," he explains.
Already popular with staffers, the stock options should become an increasingly lucrative benefit as the high-technology research-and-development company starts receiving licensing revenues for its "smart windows," a system that controls the transmission of light. The options-for-all idea could work elsewhere, but companies considering a stock-option plan should note these suggestions:
If you are a public company, make sure your plan qualifies under Securities and Exchange Commission Rule 16b-3. "If your plan doesn't fit the requirements, there are horrendous securities-law consequences," explains Joseph M. Harary, Research Frontiers' vice-president and general counsel. "Basically, if employees did not wait six months to sell their stock after they exercised their options, they would have to return all profits to the company because of something called the short-swing profit rule." (The rule penalizes quick insider transactions.) If your plan qualifies, such stock sales are exempt from that penalty.
To keep your plan qualified under 16b-3, make certain it is administered by a company director who has not received stock on a discretionary basis within the past 12 months. "Discretionary means that the director or any other company insider actively decided how much stock the director would receive," Harary explains. To avoid that trap, Research Frontiers established a formula that dictates how many options each executive and director receives a year.
Keep your plan as flexible as possible. Although a formula is essential for qualified options for executives (since executives may otherwise be able to influence how a qualified options plan is administered), Saxe avoids rigid guidelines with other employees. "Since there's no rule restricting the way we give options to people who are not executives or directors, we make those decisions on a case-by-case basis, based on a worker's seniority, merit, and importance to the company," he says.
To interpret the fine print, see IRS document 525, "Taxable and Nontaxable Income." Call 800-829-FORM to order it.