Setting Up Stock Option Plans

This chapter provides an overview of the setup steps for stock option plans, lists prerequisites, and discusses how to:

• Create vesting schedules.

• Define stock fiscal year calendars.

• Define stock option plan rules.

• Set up tax rules.

• Define grant reasons.

• Define stock action rules.

Understanding Stock Option Plan Setup

This section discusses the steps for setting up stock option plans. Depending on how your organization administers its stock option plans, the majority of this setup phase is a one-time event that requires periodic maintenance on your part.

To set up stock option plans:

1. Create vesting schedules for stock options.

2. Define fiscal year calendars for stocks, if applicable.

3. Define basic stock option plan rules.

   Basic rules include the option types allowed, payment and income methods, share rules, FMV rules, and other parameters.

4. Define the tax rules.

5. Define the various reasons that you grant stock options.

6. Define stock action rules.

   These rules specify how certain changes in an optionee's human resources status can affect how the optionee participates in your stock plan.

Prerequisites

Before you begin to set up stock option plans, define your stock administration business rules and create common setup tables.

See Also

Defining Stock Administration Business Rules

Creating Vesting Schedules

To create vesting schedules, use the Vesting Schedule (ST_VEST_SCHED) component.

This section discusses:

• Setting up vesting schedules.

• Common vesting schedules.

Vesting schedules govern when and in what proportions shares become available to optionees. Vesting schedules are used when you grant options.

You can generate the Vesting Schedule report (STUSU021) to view vesting schedule information.

See Also

Stock Option Reports Using the Common Run Control Page

Page Used to Create a Vesting Schedule

Creating a Vesting Schedule

Access the Vesting Schedule page (Set Up HRMS, Product Related, Stock, Option Plans, Vesting Schedule).

Uneven Share Rule	Indicate how the system is to handle fractional shares: Last Vest Period. Allocate to the last vesting period. This is the default value. First Vest Period. Allocate to the first vesting period. First Full Share. Accumulate over the vesting periods until the fractional shares add up to one full share, then add the share to the vesting period where that occurs.
Vesting Begin Code	Select Grant Date (the default) to have vesting start on the grant date. Select Start/Hire Date to have vesting to start on the effective date of the Action of Hire. Select Other Date to enter a random date at the time of the grant on the Maintain Grants - Vesting page, the Modify Grants - Modify page, or the Create VC Grants - Grant page.
Sequence	This field displays the row number in the vesting period sequence. Vesting schedules frequently have more than one sequence. For example, you can vest 25 percent of the grant after one year and then vest in quarterly increments over the next three years.
Vesting Frequency	You can select different vesting frequencies for different sequences within one vesting schedule. For each, the first vest date depends on the Vesting Begin Code selection. All other vest dates (excluding the first vest date) depend on the previous period vest date. The vesting frequency must logically match the vesting months. Values are Vest Date (all shares vest as of the Vesting Begin Code date), Monthly, Quarterly, SemiAnnual, and Annually.
Vesting Months	Enter the number of months in each vesting period. The vesting months must logically match the vesting frequency.
Vesting Percent	Enter the percentage of shares vested during each vesting period. The sum of the percentages must total 100%.
Period Count	This field displays the number of vest periods relative to the Vesting Frequency you selected and the number of Vesting Months you entered for the sequence. For example, if you select a Vest Frequency of Quarterly and enter 36 in the Vesting Months field, the system calculates a Period Count of 12 (the number of quarters in 36 months).

Common Vesting Schedules

Examples of common vesting schedules, and how you enter them in the Vesting Schedule page, follow.

Example 1: Shares Vest Equally Over Three Years Beginning One Year From Hire Date

You grant an option on 04/01/99 for 1,000 shares to vest equally over 3 years, starting one year from the optionee's hire date of 03/15/99. You can define a vesting schedule that looks like this:

Vesting Schedule ID: 3at33%-Service

Description: Shares vest in three equal increments beginning one year from the Service Date.

Uneven Share Rule: Last Vest Period

Vesting Begin Code: Start/Hire Date

Or you might create one entry:

Because you specified the uneven shares load at the end of the vesting schedule, the fractional one-percent share is included in the last period. The shares vest as follows:

03/15/00 - 333 shares.

03/15/01 - 333 shares.

03/15/02 - 334 shares.

Example 2: All Shares Vest at Grant

You grant an option on 04/01/99 for 1,000 shares to vest 100% on the date of grant. You can define a vesting schedule that looks like this:

Vesting Schedule ID: 100%atGrnt

Description: All shares vest on the date they are granted.

Uneven Share Rule: First Full Share

Vesting Begin Code: Grant Date

Example 3: Shares Vest Equally Over Four Years Starting One Year From a Random Date

You grant an option on 04/01/99 for 1,000 shares to vest at 25% per year over four years starting one year from a random date of 10/01/98. The vesting schedule might look like this:

Vesting Schedule ID: 4at25%-Random

Description: Shares vest in four equal increments beginning one year from a random date.

Uneven Share Rule: First Full Share

Vesting Begin Code: Other Date

Or you can create one entry:

When you grant the shares, you specify the date the shares start vesting on the Maintain Grants - Vesting page, the Modify Grants - Modify page, or the Create VC Grants - Grant page. The shares vest as follows:

On 10/01/99 - 250 shares.

On 10/01/00 - 250 shares.

On 10/01/01 - 250 shares.

On 10/01/01 - 250 shares.

Example 4: Quarter of the Shares Vest After One Year Then Monthly for Three Years

You grant an option on 04/01/99 for 1,000 shares to vest at 25% after one year from the date of grant and then monthly thereafter for the next year. You want to accumulate fractional shares over the vesting periods until they equal one full share, then add them to the vesting period where that occurs. You might define a vesting schedule that looks like this:

Vesting Schedule ID: 4YrCombo

Description: Shares vest 25% after 1 year and monthly thereafter for 3 years (36 months).

Uneven Share Rule: First Full Share

Vesting Begin Code: Grant Date

The shares vest as follows:

On 04/01/00-250 shares.

On 05/01/00- 62 shares.

On 06/01/00- 63 shares.

On 07/01/00- 62 shares.

On 08/01/00- 63 shares.

On 09/01/00- 62 shares.

On 10/01/00- 63 shares.

On 11/01/00- 62 shares.

On 12/01/00- 63 shares.

On 01/01/01- 62 shares.

On 02/01/01- 63 shares.

On 03/01/01- 62 shares.

On 04/01/01- 63 shares.

Defining Stock Fiscal Year Calendars

To define stock fiscal year calendars, use the Stock Fiscal Year (STOCK_FISCAL_YEAR) component. This section discusses how to define the fiscal year calendar for a stock.

Set up fiscal year calendars if you selected Fiscal as the Year Rule on the Stock Details - Stock Options page. This rule determines how the system calculates stock option share limits.

Suppose that you have a stock option plan that limits grants to 50,000 shares per optionee in a fiscal year. At the time of a grant, the system validates that the number of shares granted does not exceed the limit for the fiscal year as defined under the Stock Details - Stock Options page and the Stock Option Plan Rules - Shares page. If the grant exceeds the share limit you receive a warning.

Generate the Stock Fiscal Year report (STSU011) to view stock fiscal year information.

See Also

Defining Stock Option Plan Rules

Defining Rules for Stock Option Plans

Page Used to Define the Stock Fiscal Year

Defining the Fiscal Year for a Stock

Access the Stock Fiscal Year page (Set Up HRMS, Product Related, Stock, Stock Rules, Stock Fiscal Year).

Fiscal Year	Enter the four-digit year of the fiscal year you are defining.
Fiscal Begin Date	This date should equal the previous fiscal year's end date plus one day.

Defining Stock Option Plan Rules

To define stock option plan rules, use the Stock Option Plan Rules (ST_OPTION_PLAN) component.

This section discusses how to:

• Define general rules for a stock option plan.

• Select payment and income methods for a stock option plan.

• Define rules to account for reacquired or unissued shares.

• Define FMV and non-trading day rules for a stock option plan.

• Define option parameters for a stock option plan.

After you create vesting schedules, you can define your option plans. Plans can include the following option types: NQ, ISO, RSA, NQ/SAR, and ISO/SAR (non qualified, incentive stock options, restricted stock awards, non qualified/stock appreciation right, and incentive stock options/stock appreciation right).

Generate the Stock Option Plan Rules report (STSU020) to view rules for your stock option plans.

See Also

Stock Option Types

Defining FMV Methods

Defining Common Rules for Stock Option and Stock Purchase Plans

Pages Used to Define Stock Option Plan Rules

Defining General Rules for a Stock Option Plan

Access the Stock Option Plan Rules - General page (Set Up HRMS, Product Related, Stock, Option Plans, Stock Option Plan Rules, General).

Option Types Allowed	Select the option types the stock plan allows. You must select at least one option type. Values are NQ (non qualified), ISO (incentive stock options), RSA (restricted stock awards), NQ/SAR (non qualified/stock appreciation right), and ISO/SAR (incentive stock options/stock appreciation right). You can grant options and define option parameters for only those option types you select here. If you select ISO, NQ is automatically selected. If you select ISO/SAR, NQ/SAR is automatically selected. When RSA is selected, Exercise Before Vest is automatically selected.
Governing Body	Select from available options. Define governing bodies with the Governing Body Rules component (ST_GOVERN_BODY).
Repurchase Cost Method	If you select Exercise Before Vest, this option is available. It determines what your company pays for shares repurchased from an optionee. Select Share Cost to pay the cost the optionee originally paid for the stock. Select Fair Market Value to pay the Fair Market Value as defined on the FMV Rules page.
Days to Repurchase	If you select Exercise Before Vest, this option is available. Enter the number of days the company has to repurchase from optionees' shares exercised but unvested.
Exercise Before Vest	If you select NQ or ISO option types, this choice is available. If you select the RSA option type, this option is automatically selected.
Transferable Options	Select to allow options to be transferred to another individual. This is informational only.

Employee Information

Use this group box to define employee retirement eligibility. The Stock – Retirement Eligibility (ST_RET_ELIG) Application Engine process updates the retirement eligibility indicators on the Maintain Grants - General page based on the eligibility rules you define here.

See Entering, Updating, and Viewing the Basic Parameters of a Grant, Processing Retirement Eligibility.

Selecting Payment and Income Methods for a Stock Option Plan

Access the Stock Option Plan Rules - Payment/Income Methods page (Set Up HRMS, Product Related, Stock, Option Plans, Stock Option Plan Rules, Payment/Income Methods).

Exercise Methods	Select the exercise methods allowed by your stock plan. Values are: Cash: The optionee pays cash for the cost of the shares exercised and taxes. Loan: The optionee obtains a loan from the company to pay for the cost of the shares exercised and/or taxes. Same Day Sale: The optionee pays for the cost of the shares exercised and taxes by having the broker immediately sell 100% of the shares exercised, and deduct the amount due from the proceeds. This is sometimes known as a cashless exercise. Sale to Cover: The broker sells enough shares to cover the exercise cost and taxes. SAR Exercise: The optionee uses the appreciation on the shares exercised to pay for the cost of the taxes. This is available only for NQ/SARs and ISO/SARs option types. If you selected a SAR option type on the Stock Option Plan Rules - General page, SAR Exercise is automatically selected. Swap: The optionee surrenders already-owned shares to pay for the cost of shares exercised. Trade for Taxes: The optionee surrenders already-owned shares to pay for the cost of the taxes.
Release Methods	Select the release methods allowed by the stock plan. Values are Cash, Loan, Same Day Sale, Sale to Cover, and Trade.
Swap Rounding Rule	If you selected Swap for Shares or Trade for Taxes, this option is available. This rule determines how fractional shares are calculated during swap exercises. Select Round Up, Round Down, Standard Rounding, or Keep Fractions. Keep Fractions is available only if fractional shares are allowed at the Stock Details level. The Rounding Rule defined on the Stock Details - Common Rules page is the default.
Income Methods	Depending on the option type selected, use these methods to calculate income on same day sales, sell to cover exercises, and disqualifying dispositions. Valid values for the NQ Sale, ISO Sale − DD, and RSA Sale fields are: Sale Price, Lower of FMV or Sale Price, or Fair Market Value (the default value).

Defining Rules to Account for Reacquired or Unissued Shares

Access the Stock Option Plan Rules - Shares page (Set Up HRMS, Product Related, Stock, Option Plans, Stock Option Plan Rules, Shares).

Share Methods

Indicate what happens to shares related to each of the events listed in the Share Methods group box. Options are:

• Return Shares to Plan: Shares return to the plan pool where they are available for grant. This is the default share method.

• Retire Shares to Treasury: Once returned to the treasury, shares are not available for grant unless allocated to a plan by the Board of Directors or the shareholders.

Share Return

Optionee Share

Fractional Share Rules

If you allowed fractional shares on the Stock Details - Common Rules page you can further restrict the number of decimal places here. Your selections on the Stock Details - Common Rules page determine the default values shown here; you can make the values more restrictive.

Defining FMV and Non-Trading Day Rules for a Stock Option Plan

Access the Stock Option Plan Rules - FMV Rules page (Set Up HRMS, Product Related, Stock, Option Plans, Stock Option Plan Rules, FMV Rules).

FMV Methods

Define the FMV methods to use for various types of transactions.

The method defined on the Stock Details - Common Rules page determines the default value. You can use different methods for different types of transactions.

Non-Trading Day Rules

The method defined on the Stock Details - Common Rules page determines the default value.

See Also

Defining FMV Methods

Defining Common Rules for Stock Option and Stock Purchase Plans

Defining Option Parameters for a Stock Option Plan

Access the Stock Option Plan Rules - Option Parameters page (Set Up HRMS, Product Related, Stock, Option Plans, Stock Option Plan Rules, Option Parameters).

This page is optional, but can help with data entry when you are administering grants.

Setting Up Tax Rules

To set up tax rules, use the Stock Tax Types (ST_TAX_TYPE), Stock Country Tax (ST_COUNTRY_TAX), Stock State Tax (ST_STATE_TAX), and Stock Local Tax (ST_LOCAL_TAX) components.

This section provides an overview of tax rule setup and discusses how to:

• Define tax types and classes.

• Define default values for country taxes.

Tax Rule Setup

By setting up default tax percentages and amounts you can limit the manual tax calculations that you need to perform when participants exercise options. You can override the defaults at the time of exercise depending on an individual employee's tax situation. However, by entering default tax information you get from your payroll administrator, you can help ensure that you don't take taxes above certain limits. If you use Payroll for North America, at a minimum, the tax types must be set up to integrate with the payroll system.

Important! The tax codes and data you enter here should be directly mapped from your payroll department. Contact your Payroll Administrator to get and maintain the information stored in these pages.

Warning! You are responsible for maintaining the default tax tables.

To set up tax rules:

1. Define tax types and classes.

2. Define default values for country taxes.

3. Define default values for state taxes.

4. Define default values for local taxes.

See Also

Stock Administration Integrations

Pages Used to Define Tax Rules

Defining Tax Types and Classes

Access the Stock Tax Types page (Set Up HRMS, Product Related, Stock, Option Tax Rules, Stock Tax Types).

Stock Tax Level	Select Country, Local, or State.
Tax Class	Select from available options. If your Stock Administration system is integrated with Payroll for North America, the Tax Class is set up in your payroll department. Work with your Payroll Administrator to find out the classes that are set up for payroll purposes to ensure the classes map correctly.

Defining Default Country Taxes

Access the Stock Country Tax page (Set Up HRMS, Product Related, Stock, Option Tax Rules, Stock Country Tax).

Default Percentage	Enter the percentage to use as default when calculating the tax due at the country level. You can override the percentage at the time of exercise or release.
Maximum Gross	Enter a maximum gross income. To indicate that there is no limit, enter 99,999,999.
Maximum Tax	The system displays the Maximum Tax based on data you entered in Default Percentage and Maximum Gross.

Defining Grant Reasons

To define grant reasons, use the Grant Reason Table (ST_GRNT_RSN_TBL) component. This section discusses how to define grant reasons.

Grant reasons are used at the time of grant, for example, new hire, performance award, and compensation review. Set up is optional.

Generate the Grant Reason Table report (STSU025) to view grant reasons.

Page Used to Define Grant Reasons

Defining Stock Action Rules

To define stock action rules, use the Stock Action Table (STOCK_ACTN_TBL), Stock Action Reason Table (ST_ACTN_RSN_TBL), and the Stock Action Rules (ST_ACTN_RULE) components. This section provides an overview of stock action rules and discusses how to:

• Define stock actions.

• Link an HR action/action reason combination to a stock action.

• Define processing rules for stock actions.

Stock Action Rules

Changes to an employee's human resource status may affect the employee's participation in your stock option plan. You can define how various changes to an optionee's human resource status affect stock plan processing. The stock action rules you define here integrate with Human Resources.

To define stock action rules:

1. Define a stock action and associate it with a stock action type.

2. Link an HR action/reason code combination to a stock action.

3. Define the rules by which existing grants and vesting schedules are to be modified by various stock actions.

The Stock Action Table

This table defines all unique stock actions that integrate with Human Resources. The effective-dated table describes each stock action and the corresponding stock action type. The system recognizes three stock action types: termination, leave of absence, and return from leave. The stock action type determines the processing that is performed when a particular stock action is processed for an employee. These actions effect existing stock option grants and vesting schedules.

Examples of stock actions you can set up and their related types are:

The Stock Action Reason Table

This table correlates HR action and HR reason code combinations with a stock action. The system refers to this table to determine when to issue a workflow notification to the stock administrator. Multiple HR action and HR Action/HR Reason combinations can correlate to the same stock action.

Some HR Action/HR Reasons that might be associated with Stock Actions are:

Stock Action Rules Table

This table defines the rules that modify existing grants and vesting schedules for terminations, leaves of absence, and returns from leave stock action. Changes that you do not define, but that always occur, such as setting cancel date and cancel reason for a termination are coded in the process.

Examples of termination stock action rules are:

Examples of leave of absence stock action rules are:

See Also

Stock Administration Integrations

Pages Used to Define Stock Action Rules

Defining a Stock Action

Access the Stock Action Table page (Set Up HRMS, Product Related, Stock, Option Plans, Stock Action Table).

Stock Action Type

Select Leave of Absence, Return from Leave, or Termination.

Linking an HR Action/Reason Code Combination to a Stock Action

Access the Stock Action Reason Table page.

You can leave the Reason Code blank and let it serve as a wild card. This causes all HR actions, regardless of reason, to be attached to the stock action.

Defining Processing Rules for a Stock Action

Access the Stock Action Rules page (Set Up HRMS, Product Related, Stock, Option Plans, Stock Action Rules).

Stock Action

Select from available options. Define stock actions on the Stock Action Table page.

Termination Rules

If the stock plan type is termination, these fields become available.

Leave Of Absence Rules

If the stock plan type is Leave of Absence, these fields become available.

If the stock action type is Return from Leave, none of the Leave of Absence Rules fields are available. You must enter a new row to enter data in these fields.