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Handbook of Corporate Equity Derivatives and Equity Capital Markets by Juan Ramirez

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8

Stock Options Plans Hedging

This chapter briefly describes the main stock-based compensation plans. These plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the employer's stock. I will start by describing the main plans. I will continue by reviewing the IFRS accounting for these plans. A good understanding of the accounting for stock-based plans is crucial in order to implement a sound hedging strategy. Next, I will examine the most common hedging strategies for hedging stock options plans, including some innovative strategies to reduce the cost of hedging these plans. Finally, I will discuss HSBC's share performance award, a highly structured share plan.

8.1 MAIN EQUITY-BASED COMPENSATION PLANS

Equity-based compensations plans are a tool to further align employee interests with those of the company's shareholders by enhancing further the link between pay and long-term performance. These compensation plans are typically discretionary, providing flexibility to reward particular achievements or exceptional performance. As a result, most compensation plans are granted to senior key talent who are actively leading the drive to achieve sustained profitability at the company and who are expected to contribute most significantly to its long-term future and economic success.

8.1.1 Main Equity-based Compensation Plans

In this section I will ...

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