Dynamic Equity Compensation Plan

.Dynamic Equity Compensation Plans

This invention creates a new equity compensation plan which has as its goals the following:1. Better employee understanding of the values of the equity compensation grants and better employee understanding of the probability of achieving substantial rewards from those grants and the risks of losing those values.2. Attract higher quality and longer serving employees because of the superior equity compensation plan.3. More intensive and longer alignment of the employees and executives with the shareholders.4. Earlier substantial cash flows to the company as the company issues and sells stock pursuant to the options exercises and tax deductions of the intrinsic values upon exercise. Tax deduction from restricted stock vesting also create early cash flows to the company.5. Enhancement of the ability of risk-averse employees and executives to more efficiently manage their equity grants.6. Reduction of potential abuses by the executives both at the time of the grants and when the equity compensation is exited.7. Moderate costs to the company for the various types of grants.

Patent Pending

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I have invented the following concepts as part of the new Dynamic Equity Compensation Plan:

1. Dynamic Employee Stock Options (DESOs),2. Dynamic Stock Appreciation Rights (DSARs),3. Dynamic Restricted Stock, (DRS) and4. Dynamic Restricted Stock Units(DRSUs).

DESOs and DSARs are very similar in their economic terms. DESOs and DSARs have the same tax treatment upon the grant, upon the exercise and upon the sale of stock. DSARs can be settled in cash therefore reducing the dilution of earning which occurs as new stock is issued from exercises of DESOs. However, reducing dilution requires reducing cash flow that is often desired by company management. DSARs have a similar design as the DESOs with regard to exercise price, time to expiration, and non-transference .DRS and DRSUs are similarly designed, with the DRSUs possibly settling in cash rather than stock. Cash settlement DRSUs will have less dilution of earnings and less cash flow as no new shares are issued with cash settlement DRSUs. But all economic terms other than the cash settlement are the same for Restricted Stock as for Restricted Stock Units. Patent Pending

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This New Dynamic Equity Compensation Plan seeks to improve all aspects of equity compensation plans. Particular emphasis will be on the company long-term alignment with the employees. Emphasis will also be on the employee's ability to understand the granted equity compensation and manage the grants with a view of efficient risk reduction and maximization of value. Possible earlier cash flows to the company will also be an area of focus.Another area of focus is to reduce the motive of possible manipulation of price of the underlying stock on the day of grant and when the positions are exited. The following slides will address first the Dynamic Employee Stock Options. Patent Pending

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I first Introduce in detail the Dynamic Employee Stock Options which illustrates that upon settlement of the exercises, the employee will receive less stock than with traditional ESOs and package of new Employee Stock Options. Its purpose in giving additional ESOs as part settlement is to extend the alignment between the employee and the company. This applies to Dynamic SARs and even to Dynamic Restricted Stock and Dynamic Restricted Stock Units. Patent Pending

Dynamic Employee Stock Options

A New Design for Employee Stock Options

John Olaguesolagues@gmail.com504-428-9912www.optionsforemployees.com

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"Options were poorly structured, and, consequently, they failed to properly align the long-term interests of shareholders and managers, the paradigm so essential for effective corporate governance. The incentives they created overcame the good judgment of too many corporate managers.”

Alan Greenspan Patent Pending

The topic of this presentation is most relevant today as there are structural problems with the traditional employee stock options. Traditional options by their nature prevent effective long term alliances between employees and shareholders largely because of the risk-averse attitudes of the employees and their interest in reducing that risk. Unless the employees, managers or executives are willing to use hedging strategies involving selling exchange traded calls or buying exchange traded puts on company stock, their only choice to reduce risk is by early exercises and sell stock, and perhaps diversify the net after tax proceeds.

This strategy of making early exercises is so highly penalized in most cases of traditional ESOs that its unwise in all but rare cases to use the strategy. In fact, if unsophisticated employees are persuaded by wealth managers to use such a strategy, the employees should consider a cause of action for violation of Fiduciary duty . Patent Pending

Is there a way to design employee stock options to make them more effective in accomplishing the goals for which they were created?Before we can answer that question, we must state the goals.

The goals are to: A. Align the interests of the managers, officers and directors with the interests of the shareholders by making the value of their equity compensation dependent on an increase in value of the company shares. B. Attract and influence high quality employees to be loyal long term employees. Patent Pending

C. Preserve and increase the cash position of the company.

D. Encourage early cash flows to the company from the early payment of the exercise price and the tax credits upon exercises. E. Allow for the efficient management of the granted options by the grantees. F. Maintain the theoretical costs of the plans to a modest level. Patent Pending

How well do Traditional ESOs accomplish those goals ?

A. The traditional ESOs do align the employee/executive with shareholders during the vesting periods and after vesting as long as the employee/executive holds the ESOs and the grantees understand the values and risks of the ESOs.

B. Company cash is preserved and indeed additional cash flows are generated by any early exercises (which are encouraged by the company and the options holders' advisers through their promotion of the premature exercise, sell stock and diversify strategy).

C. The traditional ESOs because of vesting requirements, non-transferability and non-pledgability make it difficult for risk-adverse grantees to efficiently manage traditional ESO positions. Premature exercises after vesting require penalties to the grantees in the form of: a) a forfeiture of the remaining "time value" which is quite high when volatility is reasonably high and b) an early payment of taxes. D. Early exercises, usually followed by sales of stock cause an early termination of 100% of the grantee/shareholders alignment and long term incentives from those options. E. Theoretical expenses against earnings are moderate, given the restrictions, although "fair values" on the grant day are often understated by the company.

What are Dynamic Employee Stock Options?

Dynamic Employee Stock Options are Options whereby the settlement of the exercises consist of the purchase of less than 100% of stock (perhaps 75%) plus payments in the form of new ESOs with new 10 year maximum expiration and current market prices as the exercise prices.

The exact value and number of new ESOs is determined by a formula which includes a percentage (perhaps 25%) of the full intrinsic value of the options upon exercise plus the recovery of the otherwise forfeited remaining "time value" in 100% of the options. Exercising Dynamic ESOs results in the "fair value" of the resulting combination of stock and options being equal to the "fair value" prior to the exercise. However, the exercise will cause a tax liability on 75% of the intrinsic value of the options. No "time value" is forfeited although a partial penalty for an early tax payment is incurred.

The following ESO plan goals are enhanced (see next slide).

A. A substantial alignment of interests is extended past the exercise and sale of stock as the grantee still will hold substantial new ESOs.

B. Company cash is preserved and earlier cash flows will come to the company since the employee will likely exercise earlier. The two penalties of early exercises (i.e. forfeiture of "time value" and an early tax payment) by the grantee are substantially eliminated. The grantee, therefore will likely exercise much earlier causing more and earlier cash flows to the company. C. Efficient risk management of the grants by the grantee is facilitated since most of the penalties of early exercises of traditional ESOs are eliminated. The stock can be sold and hedging will not be necessary. D. The theoretical costs to the company of the Dynamic ESOs are about 3.5% greater than traditional ESOs. See the more detailed explanation linked on slide 25.

The terms of the settlement of the exercise could be the following.

For example: Upon exercise, grantee receives 75% (rather than 100%) of the stock at the exercise price plus new ESOs with new 10 year expiration dates and market value exercise prices. The "fair value" of the new ESOs would equal the sum of a) + b) below: a) 25% of the "intrinsic value" of the exercised ESOs that would have been gained on a traditional ESO exercise, plus b) the amount of the remaining "time value" otherwise forfeited to the company upon early exercise of 100% of the traditional ESOs.

The receipt of 75% of the stock could be changed by the company to receipt of 60% or 80% of the stock at the exercise price, which will change the 25% of new options to 40% or 20%. The decision would be influenced by the how much continued alignment was sought.

The grantee would receive, in total, new options equal to 40%, 25%, or 20% of the full "intrinsic value" plus the return of 100% the otherwise forfeited "time value" in new options.

The plan could give the choices of the percentages of stock received to the grantee or pre-determined by the company.

The following two slides are familiar graphs. They illustrate among other things, the value of the "time premiums" (i.e. time value) and "intrinsic values" and how they change with different volatilities and different prices of the stock at different times.The slides also show the net take home amounts after tax for traditional ESOs exercised, assuming a total tax of 40%.The companies will take the "intrinsic value" as a tax deduction upon the exercise, thereby generating early cash flows. Dynamic ESOs will have somewhat different results. The grantee gets less stock upon exercise than with the Traditional ESOs but the grantee gets a new load of new DESOs. The tax deduction to the company will be reduced by 40%, 25% or 20 %.

Let us assume that the 1000 vested ESOs in the slides were Dynamic ESOs with a 75/25 split upon exercise with the stock at various prices and various times remaining.

First we use the .30 volatility graphs on slide 18. A. Assume the Employee exercises when the stock is trading at $30 with 5.5 years expected time to expiration. The results are: the employee receives 750 shares for a purchase price of $20 and receives new ESOs with an exercise price of $30 with 10 maximum years to expiration. The new ESOs have a value of $2500 from 25% of the "intrinsic value" plus $6114 of "time value" = $8614.He would receive 720 new ESOs, which are valued at $8614. The "fair value" of the package upon exercise that the employee receives is $7500 in intrinsic value + $8614 in new options value. Which equals the exact value the employee had prior to exercise. Of course upon exercise the $7500 is taxed at compensation income rates.

Patent Pending

B. If the employee waited until the stock increased to $50 to exercise and there were 3.5 expected years to expiration, he would again receive 750 shares at $20 and new DESOs as follows. The new options value is $7500 (i.e. $30 x 2500) plus $3368 of "time value" = $10,868, giving 530 new ESOs with an exercise price of $50 with 10 years maximum life. The full value that the employee receives is $22,500 in "intrinsic value" plus $10,868 in new ESOs, which equals exactly the value prior to exercise ($33,368).

If the assumptions in the block of the second graph (slide 19) where a .60 volatility was used, then the "fair value" after exercise would be the same as the "fair value" prior to exercise, which are greater than the "fair values" when we assumed the .30 volatility.

For example. Assume that the stock was trading at $40 with a .60 volatility when the DESOs were exercised and the split was 75% stock/25% ESOs. The grantee would receive 750 shares purchased at $20, plus new options with an exercise price of $40 with 10 years maximum life and 6.3 years expected life. The grantees value is $15,000 in receiving 750 shares 20 points below market, plus $5000 in new options value, plus the "time value" of $6460 returned in the form of new options. The total is $26,464 in value. The $11,460 would equal 521 new options.

The only penalty for early exercise is that there is an early tax required on the "intrinsic value" (i.e. $15,000) received in stock.

Exercise of Vested 1,000 DESOs with 75/25 Split

1 2 3 4 5 6 7 8 9 Stock ….Ex ..…Vol.....Expected...Time value...25% of…Colum….Total New...Tot. Intr. Val. Price….Price…….......Time to exp...Remain...Intrin.Val… 5+6 ….Option. Rec..of Stock Rec.----------------------------------------------------------------------------------------------- $30.….. $20…....30…....5.5 years……$6114..…$2500......$8614….....700...........$7500 $40…....$20…....30……4.5 years…….$4526…..$5000…..$9526….….580.........$15,000$50…….$20……30……3.5 years……$3368…..$7500....$10,868 …...530..........$22,500$60…….$20……30……2.5 years……$2372…$10,000…$12,372……503.........$30,000$30. …..$20…....60....…5.3 years…….$9300…..$2500….$11,800……715...........$7500$40.…...$20…....60……4.3 years…….$6460…..$5000….$11,464……521.........$15,000$50...….$20…….60……3.3 years…....$4740…..$7500….$12,240……445.........$22,500$60...….$20…....60……2.3 years…….$2670....$10,000…$12,670…...384..........$30,000

The options with a .30 volatility assume an interest rate of 5%The options with a .60 volatility assume an interest rate of 3%The amount of stock received upon exercise is 750 shares for a cost of $20 per share.All new ESOs have an exercise price equal to the market price and 10 years maximum life.Column 7 equals the total value of the new ESOs in each case. Column 9 shows the amount before tax

In order to discourage the manipulation of the stock price lower on the grant day, the Dynamic Employee Stock Options Plan would have the following provisions: The exercise price of every grant to officers and directors and holders of 5% or more of company stock should be the higher of the following two prices. 1. The closing price on the day of the grant 2. An average of the closing prices of 21 trading days (or business days if there is no trading or black-out periods would apply) following the grant of the options.----------------------------------------------------------------------------------------------------------In order to discourage the gaming of the exiting of stock received from the exercise of DESOs, the following provision should be included in the plans: Any sales of stock that occur at prices that are above the average closing price of the stock during 30 or 45 business days after the stock sales are to have the sales prices adjusted to the average of the 30 or 45 days after the sale. The adjustments of prices are to be made by paying to the company the difference in value received over the average from the 30 or 45 day sales price. However, the adjusted sales prices will never be less than the exercise price.

A fuller explanation of

Dynamic Employee Stock Optionscan be found at the following link

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https://docs.google.com/document/d/1wGrmquhWBKzRhVtP4RdbG5Yl6VcSW1aalDmt5vnKvE4/edit?authkey=CPWK1-kN&hl=en_US&authkey=CPWK1-kN

Dynamic Stock Appreciation Rights (DSARs)

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The only real difference between employee stock options (ESOs) and stock appreciation rights (SARs) is that the stock appreciation rights can settle the exercise by making a cash payment to the exercising SARs holder rather than issuing to the employee new shares of stock. It avoids the employee from having to sell the stock that would be received upon exercise to pay the exercise price and the withholding tax. Settlement in cash also prevents dilution of earnings but cash flows are reduced from what they would be with ESOs. Patent pending

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The two graphs below (also in slides 29 and 30) illustrate the economic consequences upon exercise of cash settled SARs to be the same as exercises of ESOs, except that there is no need to sell the stock if the SARs are cash settled. Patent Pending

The matrix below illustrate the settlement consequences of Dynamic Stock Appreciation Rights (DSARS). These consequences are equal to those of the DESOs except for the cash settlement.

Exercise of Vested 1,000 cash settled DSARs with 75/25 Split

1 2 3 4 5 6 7* 8 9 Stock ….Ex ..…Vol.....Expected...Time value...25% of...Column...Total New....Total Cash* Price….Price…….......Time to exp...Remain...Intrin.Val… 5+6 ….Options Rec..Received. ................................................................................................................................... $30.….. $20…....30…....5.5 years….$6114..…$2500......$8614…......700...........$7500$40…....$20…....30……4.5 years….$4526…..$5000…..$9526….….580.........$15,000$50…....$20…....30……3.5 years….$3368…..$7500....$10,868 …....530.........$22,500$60……$20…....30……2.5 years….$2372…$10,000…$12,372……503.........$30,000$30. …..$20…....60...….5.3 years….$9300…..$2500….$11,800……715...........$7500$40.…...$20…....60……4.3 years….$6460…..$5000….$11,464……521.........$15,000$50...….$20……60……3.3 years…..$4740…..$7500….$12,240…...445.........$22,500$60...….$20…....60……2.3 years….$2670....$10,000…$12,670…...384..........$30,000

The options with a .30 volatility assume a risk free interest rate of 5%The options with a .60 volatility assume a risk free interest rate of 3%The amount of cash received in cash settlement upon exercise equals the intrinsic value of the options.All new ESOs have an exercise price equal to the market price and 10 years maximum life.*Column 7 equals the total value of the new ESOs in each case.*Column 9 shows the amount of cash received before tax

In order to discourage the manipulation of the grants on the grant day, the Dynamic Stock Appreciation Rights Plan should have the following provisions: The exercise price of every grant to officers and directors and holders of 5% or more of company stock should be the higher of the following two prices. 1. The closing price on the day of the grant 2. An average of the closing prices of 21 trading days(or business days if there is no trading or black-out periods would apply) following the grant of the options.----------------------------------------------------------------------------------------------------------In order to discourage the gaming of the exiting of stock received from the exercise of DSARs, the following provision should be included in the plans: Any sales of stock, by officers and directors or owners of 5% or more of the stock, that occur at prices that are above the average of 30 or 45 business days after the stock sales are to have the sales prices adjusted to the average of the 30 or 45 business days after the sale. The adjustments of prices are to be made by paying to the company the difference in value received over the average from the 30 or 45 day sales price. However, the adjusted sales prices will never be less than the exercise price.

Dynamic Restricted Stock

Dynamic Restricted Stock An improvement on Traditional Restricted Stock Is a grant of traditional Restricted Stock a performance award? Or is it more a deferred cash salary or bonus where the salary or bonus is paid in the form of shares of stock after being delayed to when the Restricted Stock vests. How is the grant and vesting value dependent on the employee/executive’s performance or even the stock’s performance. If the stock goes down 30% when the vesting period expires the employee still receives the same amount of stock, although it is worth 30% less. How can that be considered a performance payment?It is true that if the stock goes up 40%, the employee receives more value but the same number of shares and that 40% increase may be a true performance payment. So in order to make the Restricted Stock a true performance payment, I have created a new type of Restricted Stock called Dynamic Restricted Stock.The number of shares that the employee receives at the time of vesting are tied to the value of the stock on the vesting day.

For example: If 5,000 shares are granted, that number either increases or decreases depending on the price of the stock on the vesting day. If the stock is trading at $50 on the grant day and is trading at $24.99 or less on the vesting day, the employee receives no vested shares and the original grant is cancelled. If the shares are trading at $50 on the vesting day, the employee receives 5000 shares. If the stock is trading at $75 or higher, the employee receives 10,000 shares. The Dynamic Restricted Stock could be designed to have less of an increase and less of a decrease in the number of vested shares, which results in less volatility in the total vesting values.

Dynamic Restricted Stock.... Type (1)The Matrix below shows the amount of stock and cash received at vesting for various prices of the stock. The number of shares to be received at prices between those listed would reflect a percent increase or decrease. For example with the stock at $62 the number of shares vesting would be 7400. Stock price…...Stock price…..# of Shares....# of Shares…Total StockGrant day…....Vesting day……..Granted….....Vesting..... Value at vesting$50…………..…….$80……………….5,000….….10,000……...$800,000$50…………..…....$75………….……5,000……...10,000…..….$750,000$50…………..…….$70………….……5,000……....9,000……...$630,000$50…………..…....$65………………..5,000………8,000……...$520,000$50….………..……$60…………….....5,000……....7,000….…..$420,000$50…………..…….$55…………….….5,000………6,000…..….$330,000$50……….…..…...$50………………..5,000……....5,000…..….$250,000$50………….….....$45…………….….5,000……….4,000……...$180,000$50….……….….…$40………………..5,000………3,000……....$120,000$50……….………..$30……………..…5,000……....2,000…..…...$60,000$50…………...…...$25…………….…..5,000……....1,000…..…..$25,000$50…………below $25………….,,,,….5,000……………0…….……….…0

Dynamic Restricted Stock Type (2)Assume the company wanted to continue the alignment beyond the vesting since most traditional RS are sold immediately at vesting. DESOs with current market exercise prices and 10 maximum years to expiration could be granted as substitutes for some stock, whose values are listed in column 5 in addition to the shares vesting as in column 4. The matrix below illustrates the payouts at various prices. 1 2 3 4 5Stock price….Stock price….....# of Shares...# of Shares……Val..ofGrant day…..Vesting day…….......Granted…...Vesting………New ESOs$50……………….$80……………..….5,000………7,000…….…$300,000$50……………....$75 ……………..…5,000…..…..7,000……….$250,000$50……………….$70………….… .…5,000………7,000……….$200,000$50……………....$65…………….…..5,000……....7,000….……$150,000 $50….……………$60………………...5,000……....7,000…….…$100,000$50……………….$55……………...…5,000……….6,000……......$50,000$50……….……...$50…………….…..5,000…….....5,000 0$50……………....$45…………………5000………..4,000 0$50….……………$40………………...5,000……....3,000 0$50……………….$30……………..….5,000……….2,000 0$50…………...….$25………………...5,000…….....1,000 0$50……….below $25…………..….....5,000…………..…0 0 The above types of restricted stock may be granted without specific performance prior to the grant. The gains above the price of $50 upward will be exempt from IRC Section 162m.

5D

Dynamic Restricted Stock Units

Dynamic Restricted Stock Units (type 1)The only differences in the Dynamic Restricted Stock Units and Dynamic Restricted Stock is the nature of the payout for the stock received upon vesting. DRSUs will be paid in cash, where DRS settles the stock value payout by an issuance of stock. This of course results in less dilution of earnings when DRSUs vest but gets no cash flow from the issuance of stock. Stock price…...Stock price…..# of Shares.....# of Shares….Total CashGrant day…....Vesting day……..Granted….........Vesting... Value at vesting$50…………..…….$80……………….5,000……….10,000…….....$800,000$50…………..…....$75………….……5,000……….10,000…..…....$750,000$50…………..…….$70………….…...5,000……..….9,000……..…$630,000$50…………..…....$65……………….5,000………...8,000……..…$520,000$50….………..……$60……………....5,000…………7,000….…….$420,000$50…………..…….$55……………….5,000………...6,000…..……$330,000$50……….…..…....$50……………….5,000…….…..5,000…..……$250,000$50………….…......$45……………....5,000…………4,000……..…$180,000$50….……….…..…$40………………5,000…………3,000……......$120,000$50……….………...$30……………....5,000…….…..2,000…..……..$60,000$50…………...…....$25…………….…5,000…….…..1,000…..….….$25,000$50……….…below $25………….…...5,000……………0…….………......…0

Dynamic Restricted Stock Units Type (2).Stock price….Stock price…...# of Shares....Cash Settlement….Val..ofGrant day…..Vesting day……....Granted….......at. Vesting…...New DESOs$50……………….$80……………..….5,000………$560,000………$300,000$50……………....$75 ……………..…5,000………$525,000……….$250,000$50……………….$70………….… .…5,000………$490,000……….$200,000$50……………....$65…………….…..5,000……...$455,000….….…$150,000 $50….……………$60………………...5,000……...$420,000…….…$100,000$50……………….$55……………...…5,000……...$330,000…….......$50,000$50……….……...$50…………………5,000……...$250,000………..……0$50……………....$45…………………5,000……...$180,000....................0$50….……………$40………………...5,000…….. $120,000....................0 $50……………….$30……………..….5,000………..$60,000....................0$50…………....….$25………………...5,000…….....$25,000....................0$50………..below $25…………..…,,...5,000…………......0.......................0

This type of DRSUs allows for longer alignment since the substantialnumber of new ESOs will influence the employee’s decision to stay to vesting and longer.

In order to discourage manipulating of the sales price for stock received and vested from Restricted Stock or Restricted Stock Units, any sales of stock, by officers and directors or owners of 5% or more of the stock, that occur at prices that are above the average of 30 or 45 business days after the stock sales are to have the sales prices adjusted to the average of the 30 or 45 business days after the sale. The adjustments of prices are to be made by paying to the company the difference in value received over the average from the 30 or 45 day sales prices. Patent Pending