Structuring Your P&G LTIP Award
In part one of this series, “Stock Options and RSUs: What You Should Know,” we reviewed the main issues involved in both stock options and restricted stock units (RSUs). Now we can more carefully examine the specific details of P&G’s Long-Term Incentive Plan (LTIP) and provide insight into how you might structure your P&G LTIP award.
P&G employees can choose how they want their equity stake structured. The choices are:
- 100% Stock Options
- 75% Stock Options, 25% RSUs
- 50% Stock Options, 50% RSUs
- 25% Stock Options, 75% RSUs
- 100% RSUs
Your P&G LTIP award will be conveyed to you as a cash equivalent, and the number of options or RSUs you will receive will be based on the corresponding value.
- Your LTIP Award: $40,000
- Your LTIP Selection: 50% stock options and 50% RSUs
- You will receive: $20,000 in stock options, $20,000 in RSUs
RSUs
The number of RSUs you will receive is the cash equivalent value ($20,000) divided by the stock price on the date of grant. If the stock price is $80 you would receive: $20,000 ÷ $80 or 250 RSUs.
Stock Options
Determining the value of a stock option isn’t as simple because many factors affect its eventual worth. Stock options only have value as the stock price grows above the price on the grant date so they cost less than a full share of P&G stock.
In our example assuming the price per stock option is $10 you would receive: $20,000 ÷ $10 or 2,000 stock options
The chart below shows the number of stock options and RSUs for each possible choice assuming the following:
- Hypothetical total LTIP cash equivalent value of $40,000
- That on the grant date the P&G stock price (cost of an RSU) is $80 and the cost of a stock option is $10
| Your Award Choice | Total Stock Options (Cash equivalent value ÷$10) | Total RSUs (Cash equivalent value ÷$80) |
|---|---|---|
| 100% Options | 4,000 | |
| 75% Options/ 25% RSUs | 3,000 | 125 |
| 50% Options/ 50% RSUs | 2,000 | 250 |
| 25% Options/ 75% RSUs | 1,000 | 375 |
| 100% RSUs | 500 |
Any of these choices offers the potential for long-term capital growth based on the future performance of P&G stock. However, your financial gain may also depend on the choice you make. Before you choose, you should consider your personal situation to determine the best alternative for you. You may also want to discuss your choice with a professional tax or financial advisor.
Evaluate Your Choices
Using the 50% Stock Options, 50% RSU example above, let’s assume stock grows over the 10-year life of the grant at a rate of 5%. The 5% growth rate in the following example is being used for illustrative purposes only and is not intended to suggest what the stock price may do in the future.
Using the assumptions listed above, the chart shows that stock options become as valuable as an equivalent grant of RSUs about three years after the grant. If we changed the stock price assumption to 8% growth per year, the point at which the stock options and RSUs would have equal value occurs at two years. If we changed it to 3% growth per year, the point at which the stock options and RSUs would have equal value occurs at about five years.
Please note: This example does not consider tax implications in your respective country. In most countries, taxation of RSUs occurs at the end of three years when the shares are delivered and stock options are usually taxed when exercised. To cover taxes, some of the shares will be automatically sold. This example also assumes that when shares are delivered at the end of the three years for RSUs, they are held as shares and continue to grow in value at the hypothetical stock price growth rate explained above.
Overlapping Grant Cycles
Under the LTIP, any RSUs are automatically delivered in shares at the end of the first three years of employment. With stock options you control when to exercise, anytime between 3 and 10 years after grant date. Depending on how you decide to structure your LTIP, each year, you may have different RSUs delivered in shares and different options becoming exercisable or expiring.
This is another benefit of working with a financial advisor; they will help you project and track the timing of your various equity awards and integrate them with your larger portfolio.
Unlike many equity award plans, P&G’s LTIP lets employees decide how to structure their equity award. This flexibility enables you to choose the best mix for your specific situation. There is no one right decision, and this guide highlights some key issues to consider as you manage your LTIP. P&G is also distinctive for the long tenure of many of its employees—a testament to the company’s reputation, work culture, and the attractiveness of its benefits, like the LTIP.
Employees are understandably concerned with how to optimize this award that they may be managing for decades in addition to their other investment holdings and retirement accounts. An experienced financial advisor can help you successfully integrate the LTIP into a broader financial plan so that you can achieve your long-term objectives and lifelong dreams.
