Hedging Deferred Compensation

Stanley Myint and Fabrice Famery

Contents

Foreword

Introduction

1.

Theory and Practice of Corporate Risk Management

2.

Theory and Practice of Optimal Capital Structure

3.

Introduction to Funding and Capital Structure

4.

How to Obtain a Credit Rating

5.

Refinancing Risk and Optimal Debt Maturity

6.

Optimal Cash Position

7.

Optimal Leverage

8.

Introduction to Interest Rate and Inflation Risks

9.

How to Develop an Interest Rate Risk Management Policy

10.

How to Improve Your Fixed-Floating Mix and Duration

11.

Interest Rates: The Most Efficient Hedging Product

12.

Do You Need Inflation-linked Debt?

13.

Prehedging Interest Rate Risk

14.

Pension Fund Asset and Liability Management

15.

Introduction to Currency Risk

16.

How to Develop Currency Risk Management Policy

17.

Translation or Transaction: Netting Currency Risks

18.

Early Warning Signals

19.

How to Hedge High Carry Currencies

20.

Currency Risk on Covenants

21.

Optimal Currency Composition of Debt 1: Protect Book Value

22.

Optimal Currency Composition of Debt 2: Protect Leverage

23.

Cyclicality of Currencies and Use of Options to Manage Credit Utilisation

24.

Managing the Depegging Risk

25.

Currency Risk in Luxury Goods

26.

Introduction to Credit Risk

27.

Counterparty Risk Methodology

28.

Counterparty Risk Protection

29.

Optimal Deposit Composition

30.

Prehedging Credit Risk

31.

xVA Optimisation

32.

Introduction to M&A-related Risks

33.

Risk Management for M&A

34.

Deal-contingent Hedging

35.

Introduction to Commodity Risk

36.

Managing Commodity-linked Revenues and Currency Risk

37.

Managing Commodity-linked Costs and Currency Risk

38.

Commodity Input and Resulting Currency Risk

39.

Offsetting Carbon Emissions

40.

Introduction to Equity Risk

41.

Hedging Dilution Risk

42.

Hedging Deferred Compensation

43.

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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