Accounting for Derivatives: Advanced Hedging under IFRS 9, 2nd Edition

Chapter 10Hedging Stock-Based Compensation Plans

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 first describe the main plans. I then review the IFRS accounting for these plans. Finally, I describe a case that covers the hedging of equity-settled stock option plans with equity swaps.

10.1 TYPES AND TERMINOLOGY OF STOCK-BASED COMPENSATION PLANS

Equity-based compensations plans are a tool to further align employee interests with those of the company's shareholders by enhancing 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 key senior executives 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.

10.1.1 Main Equity-Based Compensation Plans

In this section I will briefly describe the most common share-based compensation plans. Human resources consulting firms are constantly developing new types of plans. Additionally, changes in tax regimes usually bring new types of plans. However, most plans can be classified ...