Abstract:
The present invention relates to a method and system for structuring and providing employee compensation in the form of securities that are linked to the employer&#39;s equity but issued by a third party entity. The third-party issued securities allow the employer to avoid ongoing economic risks often associated with traditional employee compensation, provide employees with the same retention benefits as provided by traditional employee compensation, and provide the third-party entity with financial opportunities through the hedging of such third-party issued securities.

Description:
BACKGROUND OF THE INVENTION  
       [0001]     1. FIELD OF THE INVENTION  
         [0002]     The present invention relates to the field of employee options and compensation. More particularly, the present invention relates to a method and system for structuring employee compensation in the form of stock units and/or employee options that are linked to the employer&#39;s equity securities that are issued by a third party.  
         [0003]     2. BACKGROUND  
         [0004]     Companies often use conventional equity-linked compensation, such as traditional stock options, as a tool to entice potential employees and retain existing employees. In some businesses or industries, employees do expect to receive equity-linked compensation as part of their overall employee compensation. Companies can achieve a number of objectives with the conventional equity-linked compensation. One objective is to retain employees and/or align the employees with shareholders. Vesting provisions associated with equity-linked compensation provide incentives for employees to stay with a company, in lieu of forfeiting potentially valuable options. Another objective is the alignment of economic interests, wherein employees with options also have economic interests in the company that are aligned with those of the shareholders.  
         [0005]     However, there are a number of drawbacks associated with a company offering conventional equity-linked compensation, such as traditional stock options. A first drawback is that traditional stock options offer employees tangible value only when they are in-the-money, and deep out-of-the money options will lose their retention power to the employees. A second drawback is that by granting employee stock options, the company has created an exposure to a rise in its share price that—if unhedged—can transfer wealth from the shareholders to the option holders when the options are in-the-money. Furthermore, as the price of the company&#39;s share rises and more options go-in-the-money, the company&#39;s cost of covering option exercises also rises. A third drawback is that through the use of the treasury stock method, the existence of employee stock options adds additional shares to the company&#39;s diluted EPS (earning per share) calculations, thereby creating accounting dilution. A fourth drawback is the influence of shareholder advisory groups that give recommendations on levels for equity-linked employee compensation, on the shareholders, which may make new share authorization beyond the limit set by such groups impossible.  
       SUMMARY OF THE INVENTION  
       [0006]     Thus, there exists a need for a method and system for structuring equity-linked employee compensation that are free from at least some of the aforementioned drawbacks. Accordingly, embodiments of the present invention seek to structure and provide employees of a company (i.e., the employer) employee compensation in the form of equity-linked financial securities that are issued and obligated by a third party entity and not by the company/employer. Such employee compensation can provide at least the following benefits: no ongoing economic risk and the elimination of the wealth transfer issue; no EPS dilution from treasury stock method accounting; ability to use vesting provisions to maintain retention benefits; employees are aligned with shareholders; deferred taxation for employees; not counted toward cap limits set by shareholder advisory groups; no shareholder approval required; and transparency to accounting treatment by fixing compensation expense as cash paid to the third party entity.  
         [0007]     One embodiment of the present invention provides a method for an employer to provide compensation to an employee of the employer, comprising: the employer issuing at least one equity security; receiving financial proceeds from the employer; and in exchange for the received financial proceeds, issuing a first security to the employee, the first security is not issued by the employer but linked to the employer&#39;s equity.  
         [0008]     Another embodiment of the present invention provides a structure for providing an employee compensation comprising: at least one equity security unit issued by an employer; a first option linked to the at least one equity security unit and issued by a third party to an employee of the employer; and proceeds provided by the employer to the third party for the issued first option.  
         [0009]     Still another embodiment of the present invention provides a system for an employer to structure a compensation to an employee of the employer, comprising: a first server maintained by an employer; a second server maintained by a third party; the first server comprising a first computer-readable medium on which is encoded at least one programming module having program code; the second server comprising a second computer-readable medium on which is encoded at least one programming module having program code; a first programming module stored on the first computer-readable medium, for receiving input data to issue at least one equity security unit; a second programming module stored on the first computer-readable medium, for receiving and storing parameters for a first option to purchase the at least one equity security unit to the employee; and a third programming module stored on the second computer-readable medium, for generating and issuing the first option. 
     
    
     BRIEF DESCRIPTION OF THE DRAWINGS  
       [0010]     The preferred embodiments are illustrated by way of example and not limited in the following figure(s), in which:  
         [0011]      FIG. 1  depicts a high-level overview of the third-party issued, equity-linked financial securities structure in accordance with an embodiment of the present invention;  
         [0012]      FIG. 2  depicts a process flow corresponding to the structure in  FIG. 1 , in accordance with an embodiment of the present invention;  
         [0013]      FIG. 3  depicts a high-level overview of the third-party issued, equity-linked financial securities structure in accordance with an embodiment of the present invention;  
         [0014]      FIG. 4  depicts a process flow corresponding to the structure in  FIG. 3 , in accordance with an embodiment of the present invention;  
         [0015]      FIG. 5  depicts a system in which embodiments of the present invention can operate; and  
         [0016]      FIG. 6  depicts sample screenshots of a user interface that can be used to modify and transfer third-party issued options.  
     
    
     DETAILED DESCRIPTION OF THE INVENTION  
       [0017]     Reference is now made in detail to embodiments of the present invention, some examples of which are illustrated in the accompanying drawings, in which like numerals indicate like elements, showing methods and systems for structuring and offering third-party-issued, equity-linked employee compensation.  
         [0018]     Product and Process  
         [0019]      FIG. 1  depicts a high-level overview of the third-party issued, equity-linked financial securities structure  100  in accordance with an embodiment of the present invention. The structure  100  is further described below with reference to the process flow  200  shown in  FIG. 2  for structuring and offering third-party issued, equity-linked financial securities to employees of a company.  
         [0020]     Referring to  FIG. 2 , with reference to  FIG. 1 , the process  200  begins at  210  with the company  110  paying proceeds to a third-party (TP) entity  130  in return for the TP entity  130  issuing financial securities to the employees  120  of the company as part of the employee compensation in exchange for the employees&#39; services with the company  110  and/or other benefits the employees  120  conveyed upon the company  110 . For example, as shown in  FIG. 1 , the company  110  pays $100 in cash, stock, and/or other consideration as the proceeds to the TP entity  130  in exchange for the employees providing services to the company  110 . The TP entity  130  can be a financial institution, like Citigroup, or any other suitable entity involved with the financial market.  
         [0021]     At  220 , the TP entity  130  issues financial securities to the company employees  120  in exchange for the proceeds it receives from the company  110 . Thus, in the running example, the TP entity  130  issues $100 worth of financial securities to the company employees  120 . The issued financial securities can comprise equity securities, options, and/or other options-based securities that are linked to an equity in the company  110 . For example, the issued financial securities can be equity securities such as the stock units (e.g., shares) of the company  110  that have substantially identical terms and equity interest to and behave like stock that is actually issued by the company  110 , with a major difference in that the TP entity  130 , and not the company  110 , is now obligated for the stock units. In another example, the issued financial securities can be equity-linked options that give the employees  120  the right to purchase from the TP entity  130  a predetermined number of the company&#39;s equity securities (e.g., the company&#39;s issued shares) at a specified future time and at a predetermined strike price that totals the proceeds paid out by the company  110  to the TP entity  130 . Because the TP entity  130  is responsible for the issuance of the financial securities, the TP entity  130 , and not the company  110 , is now obligated for the issued financial securities.  
         [0022]     In an alternative embodiment, the TP entity  130  can issue the financial options to the company  110  in exchange for the aforementioned proceeds, whereby the company  110  can then provide the third-party issued financial securities to the company employees  120  as part of the employee compensation.  
         [0023]     At  230 , the TP entity  130  can hedge its risk against the issued financial securities by buying and selling the underlying equity securities issued by the company  110  in the market  140  as understood in the art.  
         [0024]      FIG. 3  depicts a high-level overview of the third-party issued, equity-linked financial securities structure  300  in accordance with another embodiment of the present invention. In this embodiment, third-party issued, equity-linked financial securities are also offered to the employees  120  of a company  110 ; however, they are used to exchange for existing compensation that are currently held by the employees  120  as previously issued by the company. The structure  300  in  FIG. 3  for this embodiment is further described below with reference to the process flow  400  shown in  FIG. 4 .  
         [0025]     Referring to  FIG. 4 , with reference to  FIG. 3 , the process  400  begins at  410  with the company employees  120  having previously received compensation, such as options, stocks, and/or other types of employee compensation, issued by the company  110 .  
         [0026]     At  420 , the company  110  pays proceeds to a TP entity  130  in return for the TP entity  130  issuing financial securities to the employees  120  of the company. The third-party issued securities are used to buy back or exchange for the existing compensation previously issued by the company  110  and currently held by the employees  120 . For example, as shown in  FIG. 1 , the company  110  pays $100 in cash, stock, and/or other considerations as the proceeds to the TP entity  130  in exchange for existing options held by the employees  120  as previously issued by the company  110 .  
         [0027]     At  430 , the TP entity  130  issues financial securities to the company employees  120  in exchange for the proceeds it receives from the company  110 . Thus, in the running example, the TP entity  130  issues $100 worth of financial securities to the company employees  120 . Again, the issued financial securities can comprise equity securities, options, and/or other options-based securities that are linked to an equity in the company  110 . For example, the issued financial securities can be equity securities such as stock units (e.g., shares) linked to the company&#39;s  110  stock that have substantially identical terms and equity interest to and behave like shares that are actually issued by the company  110 , with a major difference in that the TP entity  130 , and not the company  110 , is now obligated for the stock units. In another example, the issued financial securities can be equity-linked options that give the employees  120  the right to purchase from the TP entity  130  a predetermined number of the company&#39;s equity securities (e.g., the company&#39;s issued shares) at a specified future time and at a predetermined strike price that totals the proceeds paid out by the company  110  to the TP entity  130 . Because the TP entity  130  is responsible for the issuance of the financial securities, the TP entity  130 , and not the company  110 , is now obligated for the issued financial securities.  
         [0028]     In an alternative embodiment, the TP entity  130  can issue the financial securities to the company  110  in exchange for the aforementioned proceeds, whereby the company  110  can use the third-party issued securities to repurchase the existing company-issued compensation from the employees  120  as described next.  
         [0029]     At  440 , the company employees  120  return the existing company-issued compensation to the company  110  in exchange for the third-party issued securities received from TP entity  130 . Thus, the company  110  has effectively repurchased company-issued compensation with the third-party issued securities. It should be noted that the company  110  may provide its employees  120  with any suitable incentives for the employees  120  to trade out the company-issued compensation for the third-party issued securities.  
         [0030]     At  450 , the TP  130  can hedge its risk on the issued stock units by purchasing and selling other securities in the market  140  as understood in the art.  
         [0031]     The characteristics and benefits of one embodiment of the aforementioned third-party issued, equity-linked employee compensation, the third-party issued options, are described below in accordance with such embodiment of the present invention.  
         [0032]     First, compared to the cost of a third-party issued option or stock unit as described above, traditional options issued by the company  110  may be more expensive for two reasons:  
         [0033]     1) when the company  110  issues traditional options and, at the same time, purchases the underlying securities provided in the options to hedge its risk stemming from such options, the company may no longer pay the dividends on the purchased securities, but it may be exposed to the risk of a declining price in the underlying securities; and  
         [0034]     2) if the company  110  issues traditional options and subsequently purchases the underlying securities provided in the options at the time the options are exercised to satisfy the options, the company  110  is exposed to the risk of purchasing those securities at an appreciated price at such time.  
         [0035]     Second, because the company  110  has shifted the obligations under the third-party issued options as described above to the TP entity  130 , the company  110  also has shifted to the TP entity  130  any ongoing economic risk associated with the issued securities. Further, with no obligations under the third-party issued options, the company  110  can limit wealth transfer from the company&#39;s  110  shareholders to the employees  120  that could happen with traditional options because the company  110  would have to purchase the underlying securities from current shareholders at an appreciated price and transfer such securities to the employees.  
         [0036]     Third, the third-party issued options are structured such that once the employees  120  are vested with the options, the company  110  is no longer a party to the options contract. Consequently, the third-party issued options should not contribute to any potential EPS dilution. Fourth, it further follows that the use of third-party issued options does not require shareholder approval because there is no potential issuance of securities.  
         [0037]     Fifth, vesting provisions in third-party issued options can be designed to maintain retention benefits, i.e., contribute to employee retention. For example, vesting provisions of third-party issued options can include a requirement that an employee is vested with the options only after the employee has been employed by the company  110  for a predetermined period of time, e.g., three years. Separate vesting provisions can be applied to the transferability provision of the third-party issued options. For example, an employee&#39;s ability to transfer his/her third-party issued options to another party (e.g., the TP entity  130  or any other party) may occur four years after the grant, while the options may vest three years after grant. The separate transferability vesting feature of the third-party issued options can provide additional employee-retention benefits to the company  110  because employees may choose to remain at the company longer than with a standard option as they wait for the transferability vesting date, at which time they will realize higher proceeds than from a single exercise.  
         [0038]     Sixth, because the third-party issued options remain linked to an equity in the company  110 , the employees  120  with such options inherently have economic interests that are aligned with those of the shareholders.  
         [0039]     Seventh, employees can defer taxes on the options until they exercise the options and resale the purchased underlying securities.  
         [0040]     Eighth, the third-party issued options do not contribute to the cap limits that may have been set by shareholder advisory groups for equity-linked employee compensation because the company  110  neither issues the options nor is it obligated under such options.  
         [0041]     Ninth, as shown in  FIGS. 1 and 3 , the structuring of third-party issued options brings transparency to the accounting treatment by fixing compensation expense as cash paid (e.g., $100) to the third-party entity  130 . Further, the third-party issued securities can be structured so that they are considered equity instruments, as opposed to derivatives, under accounting rules and regulations. As equity instruments, the third-party issued securities do not need to be marked to market in the company&#39;s income statement.  
         [0042]     Table 1 provides an example of a third-party issued option for an XYZ Company with a sample of terms that provide the aforementioned characteristics and benefits.  
                   TABLE 1                       Maturity date   Jun. 1, 2014                   Strike Price   Average market price calculated by Citigroup from           hedging the option issuance (purchasing XYZ shares) on           Jun. 1, 2004.       Vesting   Cliff vesting at Jun. 1, 2007. If an employee terminates           employment prior to Jun. 1, 2007, the options revert           back to XYZ.       Transferability   Between Jun. 1, 2007 and Jun. 1, 2009, an employee           can elect to exercise the option. After Jun. 1, 2009, the           options become fully transferable.       Settlement   At inception and for options that revert back to XYZ,           XYZ can elect gross physical settlement, net share settle-           ment, or net cash settlement. The options require net cash           settlement upon exercise by employees.       Adjustments   Adjustments to the strike price for dividends declared by           XYZ over the term.           Adjustments in a business combination to equalize the           fair value of the options before and after the combination.           Adjustments to the strike price and/or number of shares           for other corporate actions (for example, stock dividend,           stock split, spin-off, rights offering, or recapitalization           through a special large, nonrecurring dividend).                  
 
         [0043]     System Architecture  
         [0044]     Various systems in accordance with the present invention may be constructed.  FIG. 5  is a block diagram illustrating an exemplary system  500  in which embodiments of the present invention can operate. The present invention also may operate and be embodied in other systems.  
         [0045]     As shown in  FIG. 5 , the system  500  includes a server device  510  maintained by the company  110  and a server device  520  maintained by the TP entity  130 . The server devices  510  and  520  are in communication with each other directly (as shown by the dashed line) or through a network  550  so that components in one device can communicate with components in the other device. The network  550  can be a wired or wireless network. Further, it can be a public network, e.g., the Internet, or a private data network, e.g., a local area network (LAN) or a wide area network (WAN). Moreover, methods according to the present invention may operate within a single computer.  
         [0046]     The server device  510  of the company  110  includes a processor  511  coupled to a memory device such as a computer-readable medium (CRM)  512 . Likewise, the server device  520  of the TP entity  130  includes a processor  521  coupled to a memory device such as a CRM  522 . Embodiments of computer-readable media include, but are not limited to, an electronic, optical, magnetic, or other storage or transmission device capable of providing a processor, such as the processors  511  and  521 , with computer-readable instructions. Other examples of suitable media include, but are not limited to, a floppy disk, CD-ROM, DVD, magnetic disk, memory chip, ROM, RAM, an ASIC, a configured processor, all optical media, all magnetic tape or other magnetic media, or any other medium from which a computer processor can read instructions. Also, various other forms of computer-readable media may transmit or carry instructions to a computer, including a router, switch, private or public network, or other transmission device or channel, both wired and wireless.  
         [0047]     Each of the server devices  510  and  520 , depicted as a single computer system, may be implemented as a network of computers. Thus, the server devices  510  and  520  can be, e.g., mainframe computers, networked computers, processor-based devices, or any similar types of systems and devices. Further, each of the server processors  511  and  521  can include one or more processors of any of a number of computer processors, such as processors from Intel, Motorola, AMD, Cyrix. The processor  511  executes computer-executable program instructions stored in the server device  510 , such as CRM  512 , as program code to perform the methods described above. Likewise, the processor  521  executes computer-executable program instructions stored in the server device  520 , such as CRM  522 , as program code to perform the methods described above. The computer-executable program instructions may include code from any suitable computer-programming language, such as C, C++, C#, or the like.  
         [0048]     A number of programming routines or modules can be devised to include the aforementioned program codes for structuring and generating third-party issued financial securities as disclosed in or derived from the disclosure of the present invention. According to one embodiment of the present invention, a first programming module (hereinafter, “company securities module”)  513  can be devised to have a securities template for generating an employee securities model on which third-party issued securities can be based; wherein the company securities module  513  can:  
         [0049]     1) provide a user interface to employees  120  at remote devices  560   a - n  so as to: make available offerings of third-party issued securities, such as options and stock units, as employee compensation to the employees  120 ; enable the employees  120  to sign up for the third-party issued securities offered by the company  110 ; provide the employees  120  with information about third-party issued securities in which they are vested; and enable the employees  120  to exercise or transfer their third-party issued securities as shown, for example, in  FIG. 6 ;  
         [0050]     2) receive and store securities terms and parameters, such as those shown in Table 1, for a third-party issued security as desired and/or entered by the company  110  in a company database  514 ;  
         [0051]     3) retrieve the aforementioned terms and parameters for its securities template so as to generate the employee securities model on which the third-party issued securities can be based. The company options module  513  can be stored in the CRM  512  or any other suitable memory device accessible by the company  110 ; and  
         [0052]     4) communicate with the third-party server device  520  and various components therein as mentioned below for the second programming module.  
         [0053]     Although  FIG. 6  shows a user interface of a graphical type (e.g., , a GUI or graphical user interface), the user interface also can be a voice response system (e.g., an IVR or interactive voice response), and/or a multi-lingual call center, with which the employees  120  can communicate using a voice communication device, such as a telephone, or a text-to-voice device.  
         [0054]     A second programming module (hereinafter, “TP-issued options module”)  523  also can be devised to have a securities template for generating the actual third-party issued securities, such as options or stock units; wherein the TP-issued securities module  523  can:  
         [0055]     1) communicate with the company securities module  513  to retrieve the company securities model, store the company securities model in a third party database  522 , and/or generate third-party issued securities based on such model;  
         [0056]     2) communicate with the company database  514  to retrieve stored terms and parameters for third-party issued securities as mentioned earlier, store such parameters in the third-party database  524 , and/or generate third-party issued securities for the employees based on such parameters; and  
         [0057]     3) provide a user interface to employees  120  at remote devices  560   a - n  so as to: make available offerings of third-party issued securities as employee compensation on behalf of the company  110 ; enable the employees  120  to sign up for the third-party securities offered; provide the employees  120  with information about third-party issued securities in which they are vested; and enable the employees  120  to exercise or transfer their third-party issued securities as shown, for example, in  FIG. 6 .  
         [0058]     In the embodiment shown in  FIG. 3 , wherein the company  110  can repurchase existing company-issued securities by offering third-party issued securities, the TP securities module  523  can also provide a user interface to employees  120  at remote devices  560   a - n  that allows the employees  120  to perform such exchange. For example, an employee  120  can use a remote or client device  560   a  to access a user interface similar to the one shown in  FIG. 6 , except that the employee  120  is further provided with, or in lieu of, an option to perform an exchange wherein the employee  120  can be presented with information about both the existing company-issued securities and the new third-party issued securities. Further, the TP securities module  523  can receive the aforementioned company securities model that comprises information of the existing company-issued securities so that it can generate the third-party issued securities substantially identical or based on such model.  
         [0059]     According to one embodiment of the present invention, a third programming module  515  also can be devised to include a securities template and resided on the company server device  510  so that it can be used by the company  110  to generate the underlying securities provided by the third-party issued securities.  
         [0060]     Although the invention has been described with reference to these preferred embodiments, other embodiments could be made by those in the art to achieve the same or similar results. Variations and modifications of the present invention will be apparent to one skilled in the art based on this disclosure, and the present invention encompasses all such modifications and equivalents.