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Basics: Grants

What is the process of granting equity awards?

Stock grants, such as options or restricted stock, are typically determined by the group or person that sets cash compensation levels and bonuses at your company (see an FAQ on grant guidelines). This may be the compensation or HR department. In large companies, input will be sought from your supervisor or manager (as with raises), compensation analysts, and/or compensation consultants. For high-level employees and executives, these recommendations flow to the board of directors of the company or, in public companies, to an independent compensation committee.

The full board, compensation committee, or duly authorized officer of the company then takes formal steps to approve the grants (see Section 157 of Delaware General Law). The grant is not official until it is formally authorized (i.e. the company must complete all actions needed to create a legally binding option right). The grant date can be the approval date when the key terms are not negotiable and are communicated soon after approval. While stock option grants for new hires can be authorized in advance, the exercise price is based on the market price of the underlying stock on your start day or on a fixed date each month (e.g. the last day of the month, or the first day of the next month), when the option is officially granted. (See a related FAQ on setting exercise prices and another FAQ on setting grant dates.)

Alert: The process for granting equity awards to senior executives is closely scrutinized, as shown by the scandals about backdating and springloading, and by the SEC's executive compensation disclosure rules (see pages 21–23), released in 2006.

In many instances, the company president, the HR director, or a senior manager informs you that this process has been completed. You then receive, either in person, by mail, or by email, the specific terms of the award in a grant agreement.

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