Restricted Shares

A restricted share is a stock of the company that cannot be transferred to a person until fulfilled certain conditions. When the conditions are satisfied, the share can be transferred to the person who got the reward. Executive package always contains restricted shares. The condition may retain the employee to work in the company for the period which is called the vesting period. Apple granted one million restricted shares to Cook. Half of these will vest in five years and the remaining shares in ten years. If Cook is still working in Apple after the vesting period, his potential reward is equal to the market price of the share when he sells the share and worth more if the stock rises or he will become the shareholder and get the dividend.

Share option is a right granted by the listed company to the individual to buy company's share at a fixed price in future time. The person can exercise the option after the vesting period. The subscription price of the share option is not less than the market price on the granted date. Most of the options have an expiration date and it will become worthless when the options are not exercised within the period.

The value of restricted share is equal to the market price but the value of the share option is equal to the difference between the subscription price and the market price. The employee can exercise the option and keep the shares. They can sell the share at a higher price and get higher profit. The value of the reward to the employee is different from restricted shares. The company needs to recognize the fair value of the share options expenses when the options are granted.

The restricted shares can retain the employee to work in the company during the vesting period and motivate the employee to think as the owner of the company. After fulfilled the restrictions, the employee get the shares and align the interest with other shareholder to vote in AGM and receive the dividend as long as they hold the shares. If the share price goes down, the restricted shares still has value until it goes to zero. The restricted shares can prevent the accounting manipulation for the option backdating. The share option only has value when the share price higher than the exercise price. It will encourage the manager in risk-seeking behavior to inflate the share price before he exercises the options.

According to the accounting standard, the company needs to expenses the fair value of share options in the financial statements, it is more transparent to shareholders than granting restricted shares.