Share Counting

RiskMetrics Group (RMG) views the following types of share counting as “liberal share counting” provisions:

  • Adding back shares tendered by an option holder to pay for the exercise of an option,
  • Adding back shares withheld for taxes upon exercise/vesting of an equity award under the plan,
  • Adding shares to the plan that are repurchased on the open market using stock option exercise proceeds, and
  • Counting only the net shares issued upon exercise of a stock option or stock appreciation right upon exercise.

Note that the net-share counting provision effectively undercut the utility of Stock-Settled Stock Appreciation Rights (SSARs) which were being suggested as an alternative to stock options a few years ago when FAS 123R became effective.  The main benefit of SSARs, only counting the net shares issues against a plan’s share authorization, has been eliminated, and so there is generally little benefit in using SSARs over stock options in most situations.

Under RMG’s cost policy, any portion of the shares available for grant under the plan which are subject to the liberal share counting provisions are treated as Full Value Awards, i.e., they will carry a much higher cost.  Consequently, if either a Fixed Limit on Full Value Shares or Flexible Share Poll share authorization are used, no liberal share counting provisions can exist in the plan in order for the limit/share counting to function for purposes of the RMG cost model.