This excerpt taken from the DTV DEF 14A filed Apr 21, 2008.
How is long-term compensation allocated among different compensation elements and alternatives?
The Committee has determined that a long-term incentive program should reward successful development and execution of business plans that are expected to increase the value of the Company's stock over time. The Committee recognizes that different forms of long-term incentive compensation, both cash-based and stock based, meet this objective and that the forms of incentive compensation may be used singly or in combination.
Mix of Incentives. The Committee uses a mix of incentives and allocates the target long-term incentive opportunity value between multiple forms of long-term incentives. This allows the Committee to:
For example, in 2007, for the Chief Executive Officer's new long-term equity incentive, approximately 50% of value was allocated to options and the remainder to performance-based restricted stock units, or RSUs. A stock option generally does not provide any value to the executive unless and until the market price of the stock increases, but provides greater upside potential than an equivalent-value restricted stock unit award. A performance-based RSU may provide some value to the executive even if the market price of the stock does not increase, but provides less upside potential than an equivalent-value stock option award. Also, depending on the Company's performance against the applicable performance measures, an RSU provides upside and downside unrelated to overall stock market performance which may affect the Company's stock price.
Performance-Based Shares. The Committee has determined that performance-based shares, a form of long-term incentive that is denominated and paid in shares of Company stock, meet compensation program objectives identified above by:
The Committee intends to use performance measures that, if achieved or exceeded, are expected to increase the value of the Company's stock. Thus, the value of the incentive awards to the executives increase by the achievement of the business measures or by increasing the value of the stock, and the value of the incentive awards decrease if business measures are not achieved or the stock price declines. The Company believes that the performance measures which have been established for performance-based share awards issued to executives are challenging and generally exceeded consensus analysts' expectations at the time the performance criteria were established by the Committee.
Stock Options. Stock options also meet the Committee's objectives. If the stock price remains unchanged or decreases, a stockholder retains some value in their investment, while the executive earns no value for the stock option. However, stock options provide significant upside opportunity, based solely on increases in the market price of the Company's stock.
To ensure that the stock market price increase is sustained, the Committee restricts the ability of the executive to exercise the option and purchase the underlying shares by establishing vesting schedules that require the passage of time before the option is exercisable (e.g., vesting one-third of the options per year for three years). This feature also serves as a retention tool, since the options will generally terminate if the executive voluntarily ceases his employment or is terminated for cause.