This excerpt taken from the DTV DEF 14A filed Apr 20, 2009.
How is long-term compensation allocated among different types of stock awards?
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. We recognize 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. We use a mix of incentives and allocate the target long-term incentive opportunity value between multiple forms of long-term incentives. This allows us to mix performance-based incentives with stock price appreciation or other objectives, balance different levels of upside opportunities and downside risks related to performance targets, and provide different forms of incentives with different time periods to achieve the performance objectives.
For example, the Chief Executive Officer's long-term equity incentive set in his 2007 Employment Agreement has approximately 50% of targeted opportunity value allocated to stock options and the remainder to performance-based RSUs.
Stock Options. 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 over its normal ten-year term than an equivalent-value three-year RSU award. If the stock price remains unchanged or decreases, stockholders retain some value in their investment, while the executive earns no value for the stock option. 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, we restrict the ability 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.
Performance-Based RSUs. RSU Plans meet the compensation program objectives by (i) awarding more or fewer shares compared to the initial target based on performance against one or more pre-set business performance measures, and (ii) increasing or reducing the potential value of the shares to be paid out based on the market price of the Company's stock. We intend 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. We believe that the performance measures which have been established for the RSUs are challenging and generally exceed consensus analysts' expectations at the time the performance criteria are established by the Committee.