Reference no: EM132889549

Problem - Robert Garcia, CEO of AM Technologies (AMT), has just learned that, for the third time in four months, a key executive has left the company to pursue a better-paying opportunity with a competitor. Robert is concerned that, without a proper incentive compensation plan, AMT will lose other key executives and the company's future could be in jeopardy. Robert determined that the executives expected AMT's stock to generate only modest returns in the stock market over the next several years, meaning that AMT's stock option plan would not produce the large gains that were historically observed. Robert has therefore proposed eliminating the stock option plan and replacing it with a restricted stock plan. Under Robert's plan, company executives would be given shares of restricted stock that could not be sold unless the executive remained with AMT for 10 years. If an employee were to leave prior to that period, the shares would be forfeited. Robert believes that such a plan would increase retention.

The restricted stock plan has three other features that make it attractive. First, because restricted stock consists of actual shares rather than the option to buy future shares, AMT will grant fewer shares than it would under the stock option plan, resulting in lower compensation expense and higher income. Second, executives would also receive dividend payments on the restricted stock, even if the stock has not vested. Therefore, by increasing the dividend, AMT could actually pay the executives a "cash bonus" without having to recognize compensation expense. Finally, employees will have something of value, even if the stock price doesn't increase. As the accountant for AMT, what is your reaction to Robert's proposal?