Lesson 6 of 7 · 14 min
Share-based compensation: stock grants, options and SARs
Share-based pay is measured at fair value on the grant date and expensed over the vesting period, whatever the share price does afterwards.
In short
- Aim: align employees with shareholders, with no current cash outlay. Downsides: dilution, rewards partly outside the employee's control, and either risk aversion (large share holdings) or excess risk-taking (options).
- Both IFRS and US GAAP: grant-date fair value, expensed ratably over the service (vesting) period. Later share price changes do not affect the expense.
- Stock grants (outright, restricted, performance shares): fair value is usually the market price at grant.
- Options: fair value must be estimated with a model (Black–Scholes, binomial). Higher volatility, longer life and a higher risk-free rate raise value; a higher dividend yield lowers it.
- Expense reduces retained earnings and raises paid-in capital: no net effect on total equity. SARs and phantom shares are cash-settled and do not dilute.
Unlock this lesson free for 7 days
Create a free account to get 7 days of full access — every lesson, video, flashcard, mock and the question bank. No card needed.