ScanSource Inc. approved a new form of compensation for its executives today after shareholders sued the company amid an options backdating scandal. The new compensation plan calls for restricted stock to be used instead of options, which the ScanSource CEO Mike Bauer said is common among other public companies in their industry. In fact, restricted stock has become more and more popular ever since Microsoft switched over not long ago. What's the difference? Well, stock options give you the right to buy shares at a certain price, but if the stock falls below that level, they expire worthless. Recent problems surfaced in instances where backdating occurs - that is, when these options are granted at "certain prices" well below the current market price at the time, making the options instantly worth millions in some cases. Restricted stock, on the other hand, is actual stock that is given to executives with a provision saying that they are not allowed to sell it for a certain amount of time (typically six months). This prevents any opportunity for backdating and forces executives to invest on a more long-term basis.
However, restricted stock isn't as widely used as stock options because they are disadvantageous to executives in many ways. First, they are taxed in the same year they are issued. Unlike stock options, which are taxed when exercised, restricted stock is treated just as normal compensation. Secondly, since restricted stock is actual stock, companies tend to issue much fewer shares than they would options. Although restricted stock can never expire worthless, this often limits the upside and leaves them exposed on the downside. Despite these problems, restricted stock may be the answer for shareholders concerned that executive interests are misaligned with their own. Perhaps we will see more of these trends in the future.
Mentioned CompaniesScanSource, Inc. (NDAQ:SCSC)