Disadvantages Of Restricted Stocks

But restricted stocks aren't perfect. As with any compensation scheme, they have some disadvantages. The first one is that the shares don't have a real value. Why? Because they can't be sold. If a product doesn't have a real, not potential, market, then it's true value is zero.

Another disadvantage is that if the stock is tied up to the performance of the company, it will be subject to any changes in the accounting procedures. For example, the financial scandal generated by Enron, forced the US Government to change the law. This generated higher operating costs inside corporations. As a consequence, the profit margins of companies across America have been compromised.

Rate this Article

Excellent   Good   Average   Bad   Terrible Current Rating

It must be mentioned that restricted stock award should not be confounded with other kind of financial tools used by corporations. Reverse or forward split stock isn't the same thing as shares that are restricted; reverse split stock, for example, means that the company wants to increase the value of each share (the way of doing it is by reducing the amount of shares that exist in the market).

On the other hand, forward split stock is used for reducing the value of the share. This is done through the emission of more stock, ergo, price of the original one is reduced. This strategy is quite useful for a company that wants to make it's share more marketable. As it can be seen, theses financial tools aren't alternatives or options vs. restricted stock.

Accounting for restricted stock has made life easier to many corporations. They have found in this financial tool a means to control any unethical behavior that could arise among it's executives. Specially if we consider cases like Enron or WorldCom. For this and the other motives mentioned above, it is no surprise then that you will find restricted stock options in your future compensation.

Bookmark this page Email this to your Friend Add this page to del.icio.us