On August 1, 2003, the board of directors of Incent.Com approved a stock option plan for its middle managers and software design professionals (100 employees). The plan awards 1,000 shares of $5 par value common stock to each employee. The grant date is January 1, 2004. The option (exercise) price of the shares is the opening stock price on January 1, 2004 ($20). The options are nontransferable and are exercisable after December 31, 2008. The options expire when the employee leaves the company or on December 31, 2015, whichever is first. Management estimates annual forfeitures will be 4% and that the expected life of the options is 6 years. The fair value of the options based on the Black-Scholes Options Pricing Model is $8 per option. On the first exercise date, 50,000 options are exercised when the stock price is $60 per share.
a. Is this a compensatory or noncompensatory stock option plan? Explain.
b. Why would Incent.Com offer such a plan to its employees?
c. What is the grant date, vesting date, and exercise date for this ESO plan?
d. Are the stock options “in-the-money” at the grant date? Explain.
e. When should total compensation cost be measured? Explain.
f. How much compensation cost should be recognized in total in relation to this stock option plan?
g. In which periods should total compensation cost be allocated to as compensation expense?
h. Explain how this ESO plan transfers wealth from stockholders to employees.