Damodaran on Valuation

11.3. RESTRICTED STOCK

While options have claimed the lion's share of the attention, when it comes to equity compensation, giving equity in firms is a practice that predates options by decades. Firms, private and public, have attracted employees by offering them equity stakes in addition to conventional compensation. When shares are offered to employees, it is not surprising that there often are restrictions imposed on laying claim to these shares and trading them. These restricted stock issues have made a comeback in recent years as the abuses of employee options have come to light. In July 2003, Microsoft switched from using options to issuing restricted stock, representing the most prominent example of this trend.

11.3.1. Use of and Accounting for Restricted Stock

As with employee options, we begin by looking at both the prevalence of restricted stock issues and the question of what types of companies are most likely to use restricted stock. We also look at the typical restrictions that are built into these shares, and how accounting rules for restricted stock have evolved over time.

11.3.1.1. Magnitude and Usage

There has been a clear shift away from employee options, especially since the announcement of FAS 123R, though the evidence is still anecdotal for the most part. A survey by Mercer, a consulting firm, in May 2004 noted that about two-thirds of all firms surveyed had changed their equity compensation programs in response to the option expensing rule. Among the firms ...