A company's share price can double after a grant date and its reported stock compensation expense will not move by a single unit. That frozen measurement is where most exam traps on this reading live.
Compensation is split by two questions: how long between service and payment, and what form the payment takes.
- Short-term benefits: paid within 12 months. Salaries, wages, annual bonuses, medical care, social security contributions, paid leave.
- Long-term benefits: paid after 12 months. Sabbaticals, long-term disability.
- Termination benefits: paid on separation. Severance, continued medical coverage, outplacement services.
- Share-based compensation: paid in, or by reference to, the employer's shares. Restricted stock, restricted stock units, stock options.
- Post-employment benefits: paid after retirement. Pensions, retiree medical and life insurance.
The unifying principle is that the employer recognizes the fair value of compensation as expense in the period the employee provides service. Vesting is when the employee becomes unconditionally entitled to the pay; settlement is when the employer actually hands over cash or shares. Grant, vest, settle is the timeline for every category.
Common mistakes
- Remeasuring equity-settled awards. Expense for a given grant is frozen at grant-date fair value. A 25% higher share price at a later grant date raises expense only on that later grant, not retroactively.
- Adding all unvested awards to the share count. The treasury stock method nets out assumed repurchases; only the excess of issuable shares over assumed repurchases is dilutive.
- Trusting a US GAAP effective tax rate. Excess tax benefits cut the rate below statutory when the share price is rising and evaporate when it falls. IFRS reporters route the same amounts through equity, giving steadier rates.
Bottom line
- Five categories: short-term, long-term, termination, share-based, post-employment; split by timing and form of payment
- Core principle: recognize fair value as expense in the service period; grant, vest, settle
- Equity-settled awards use grant-date fair value, never remeasured; offset goes to a reserve in equity, not a liability
- RSU fair value is the share price; option fair value requires a model, with volatility the most subjective input
Exam shortcut
If the vignette gives a share price after the grant date, it is almost always a distractor. Compute expense as grant-date fair value divided by the vesting years and move on. Stem says "at the money" plus "average share price below strike"? The options are anti-dilutive; the trap answer adds them anyway. Stem contrasts effective and statutory tax rates during a share price rally?
The full lesson (about 2,884 words, 19 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- employee compensation
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