Shows the differences of three types and concludes that Dynamic ESOs is superior. http://www.wiley.com/WileyCDA/WileyTitle/productCd-0470471921.html

1. Comparison of Three Different Types of
Equity Compensation
1.Traditional Employee Stock Options
2. Restricted Stock
3. Dynamic Employee Stock Options

2. Before I can make a good comparison, I wish to state four objectives of
the grants that are most relevant to the comparison:
1. The First objective of a grant of equity compensation is to align the
long term interests of the employee or executive with the interests of
the shareholders.
2. The Second objective is to attract high quality long term employees
and executives while preserving cash and enhancing cash flow.
3. The Third objective is to accomplish the first and second objectives
without too much dilution of earnings and with as little real and
theoretical costs.
4. The Fourth objective is to make the plan understanable to the
grantees and allow efficient risk and tax management by the grantees
and to allow the grantee to maximize his/ her returns.

3. Traditional Employee Stock Options (non- qualified)
a) Aligns Interests of grantees with shareholders temporarily until
exercises and sales eliminate any alignment perhaps encouraged by
promoters of early exercise, sell and "diversify" strategies.
b) Awards a non-taxable value to the employee upon grant. Taxes are
due upon exercise not vesting as in Restricted Stock.
c) Attracts long term highly qualified loyal employees.
d) Preserves company cash and upon exercise creates major cash
flows to the company from tax credits and payment of exercise price
by employees.

4. e) Efficiently reducing risk because of non transferrability, non
pledgability requires hedging by employee. The strategy of premature
exercises, sell and diversify has penalties that are near impossible to
overcome in most cases.
f) Exercise price possibly can be repriced if stock declines significantly.
g) High chance of loss of 100% of grant value
h) Greater up side potential for ESOs per dollar of "fair value" granted
compared with restricted stock.
i) Greater potential earnings dilution with ESOs grants if "fair value" of
ESO grants are equal to the "fair value" of Restricted Stock.

5. Restricted Stock
a) Aligns Interests of employees with shareholders until vesting and
sale of stock. Usually 100% is sold immediately after vesting, which
ends all alignment.
b) Awards a non-taxable value to the employee upon grant. Vesting
causes an immediate tax liability.
c) Attracts long term highly qualified loyal employees.
d) Preserves company cash and creates early major cash flows to
the company from tax credits upon vesting but not from payment of
an exercise price by employees as with ESOs. Grantees generally
pay an earlier tax with Restricted Stock grants.

6. e) Restricted Stock are less volatile than ESOs and do not erode
over time.
f) Less potential dilution occurs per dollar of "fair value" granted
compared with Dynamic ESOs and TESOs
g) Risk of 100% loss value is far less than risk of loss on ESOs.
h) No repricing possible with restricted stock
i) Easier to understand by executives and employees and easier to
risk manage because there is no extra penalties to sale after
vesting in the form of forfeited "time value" or early payment of
taxes upon vesting.
j) Restricted Stock may not be fully exempt from IRC Section 162
(m)

7. Dynamic Employee Stock Options
a) Aligns the Interests of employees with shareholders for much
longer periods than traditional ESOs. The extra costs to the
company are incidental.
b) Awards a non-taxable value to the grantee on grant day. Tax
liability occurs on exercise not upon vesting and is 25% less than
TESOs.
c) Attracts long term highly qualified loyal employees with a superior
equity compensation plan compared to traditional ESOs or RSs.

8. d) Preserves company cash and increases early cash flows to the
company from tax credits and sale of stock as employees will exercise
much earlier since early exercises are penalized only incidentally.
e) Allows for a simple highly efficient risk and tax management method by the
employee by reducing the penalties of early exercises and sales
f) Greatly reduces the need for hedging with calls and puts and reduces the
opportunities for gaming exit strategies.
g) DESOs are better for the company and better for the employee compared
with ESOs or RS, although DESOs are a bit more complicated.
h) DESOs make the Wealth Managers job a lot easier because when the
Wealth Manager advises early exercise, sell and diversify, he eliminates any
claims of fiduciary duty violations.

9. Summary:
We have illustrated that Dynamic Employee Stock Options are
far superior to Traditional ESOs and far superior to Restricted
Stock as an Equity Compensation vehicle.
See the link below for more details on Dynamic Employee Stock
Options.
http://www.slideshare.net/OLAslideshare/dynamic-equity-
compensation-plan-6
http://www.slideshare.net/OLAslideshare/new-
dynamicemployeestockoptionspresentati-4-12038997