The Handbook of Corporate Financial Risk Management (2nd Edition)
First published:
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Hedging Deferred Compensation
Hedging Deferred Compensation
Foreword
Introduction
Theory and Practice of Corporate Risk Management
Theory and Practice of Optimal Capital Structure
Introduction to Funding and Capital Structure
How to Obtain a Credit Rating
Refinancing Risk and Optimal Debt Maturity
Optimal Cash Position
Optimal Leverage
Introduction to Interest Rate and Inflation Risks
How to Develop an Interest Rate Risk Management Policy
How to Improve Your Fixed-Floating Mix and Duration
Interest Rates: The Most Efficient Hedging Product
Do You Need Inflation-linked Debt?
Prehedging Interest Rate Risk
Pension Fund Asset and Liability Management
Introduction to Currency Risk
How to Develop Currency Risk Management Policy
Translation or Transaction: Netting Currency Risks
Early Warning Signals
How to Hedge High Carry Currencies
Currency Risk on Covenants
Optimal Currency Composition of Debt 1: Protect Book Value
Optimal Currency Composition of Debt 2: Protect Leverage
Cyclicality of Currencies and Use of Options to Manage Credit Utilisation
Managing the Depegging Risk
Currency Risk in Luxury Goods
Introduction to Credit Risk
Counterparty Risk Methodology
Counterparty Risk Protection
Optimal Deposit Composition
Prehedging Credit Risk
xVA Optimisation
Introduction to M&A-related Risks
Risk Management for M&A
Deal-contingent Hedging
Introduction to Commodity Risk
Managing Commodity-linked Revenues and Currency Risk
Managing Commodity-linked Costs and Currency Risk
Commodity Input and Resulting Currency Risk
Offsetting Carbon Emissions
Introduction to Equity Risk
Hedging Dilution Risk
Hedging Deferred Compensation
Stake-building
Employee share ownership plans are widely used as a form of compensation by many public and some private companies, especially start-ups. Recently created companies may lack the cash or prefer to invest the existing cash into growth opportunities, making equity compensation an interesting way to attract high-quality employees. In addition, ESOPs align the economic interests of employees with those of the shareholders. However, these programmes expose the plan sponsor to a number of risks. First, ESOP liabilities that are cash-settled expose the company to cashflow risk in the case of rising share price. Second, cash-settled ESOP liabilities are generally required to be recognised at fair value through the income statement (IFRS 2 share-based payments). This volatility is difficult to budget for, and in adverse scenarios can result in a company missing earning projections. If deferred compensation is settled by physical delivery of underlying shares, there is no P&L volatility, but there is dilution risk (as in the previous chapter) and there is economic risk. For this reason, companies provide detailed explanations of executive compensation in financial statements and other
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