compensation granted to the employees in a plan unit under a new or revised plan described in paragraph (a) (2) of this section during the first consecutive 12-month period under which the plan operates shall not exceed the base year amount.

(3) Definition. For purposes of this section, the term "base year amount" means (i) in the case of a plan described in subparagraph (1) of this paragraph the amount (in dollars or where applicable, in dividend or share units) of an item of incentive compensation granted to the employees in a plan unit under a plan in one of the last 3 plan years ending before November 14, 1971, or (ii) in case of a new or revised plan described in paragraph (a) (2) of this section during the first consecutive 12-month period under which such a plan operates the amount (in dollars, or where applicable, in dividend or share units) of an item of incentive compensation estab lished by the Pay Board.

(c) Rules with respect to computation of allowable amount-(1) Deferred payments (i) Items deferred from an earlier year. An item of incentive compensation paid to the employees in a plan unit during any wage year which was granted to any such employees during an earlier wage year shall not be considered as an item of incentive compensation for such employees for the wage year during which such item is paid.

(ii) Items deferred to a later year. An item of incentive compensation granted to the employees in a plan unit during any wage year which is deferred to a later wage year shall be considered as an item of incentive compensation for such employees for the wage year during which such item is granted.

(iii) Definition. For purposes of this subparagraph an item is considered as being "granted" during the wage year in which services are performed giving rise to the obligation to pay for the performance of such services whether or not such obligation is contingent upon the performance of future services or any other condition or restriction.

(2) Excesses. If the amount of any item of incentive compensation awarded pursuant to a plan described in paragraph (a) of this section is in excess of the allowable amount with respect to such item determined pursuant to the rules contained in paragraph (b) of this section, such excess shall be deemed to be

an increase in wages and salaries paid for the wage year the excess occurs with respect to the covered plan unit. Such excess shall be apportioned to the appropriate employee units of the employees participating in the plan unit. The amount of excess which shall be apportioned to an appropriate employee unit shall be determined as follows: The number of employees in an appropriate employee unit who are participating in such a plan unit multiplied by a fraction, the numerator of which is the amount of the excess and the denominator of which is the number of employees in the plan unit. Such amount shall not be allowed to increase the maximum permissible annual aggregate wage and salary rate increase with respect to an appropriate employee unit, but shall reduce the maximum permissible aggregate wages and salaries payable to an appropriate employee unit by the amount of the excess for the wage year the excess occurs. For purposes of determining the amount of any excess with respect to phantom stock awards each phantom dividend or share unit shall be deemed to be an actual share of stock not subject to any restriction.

(3) Credits. If the amount of any item of incentive compensation granted pursuant to a plan described in paragraph (a) of this section is less than the allowable amount with respect to such item determined pursuant to the rules contained in paragraph (b) of this section, the amount equal to the difference between such allowable amount and the amount of the award granted but no more than the difference between the allowable amount and the base year amount may be used by the employer as a credit for wages and salaries payable in the wage year in which such amount which is less than such allowable amount occurs with respect to the employees participating in the covered plan unit. The amount which may be so credited shall be apportioned in the same manner described in subparagraph (2) of this paragraph providing for apportioning excesses, provided, however, such amount shal not constitute wages and salaries for the purpose of computing the amount of any increase in wages and salaries for the following wage year and shall not be allowed to increase the maximum permissible annual aggregate wage and salary rate increase with respect to an appropriate employee unit.

(4) Valuation of items of incentive compensation. The amount of an award shall be determined as follows

(i) For phantom stock awards: In dividend or share units;

(ii) For incentive bonuses awarded in stock: In dollars in an amount equal to the fair market value of such stock at the time of the award regardless of any conditions or restrictions less the amount (if any) paid for such stock by the employee;

(iii) For incentive bonuses awarded in property other than stock: In dollars in an amount equal to the fair market value of such property at a time of the award, regardless of any conditions or restrictions, less the amount (if any) paid for such property by the employee;

(iv) For employer contributions such as contributions to incentive stock bonus plans (whether or not described in section 401 of the Code), stock purchase plans, or profit sharing plans which fail to meet the requirements of section 401 of the Code: In dollars in an amount equal to the employer's contribution regardless of any deferral in time of the employee's rights under such a plan or any other condition or restriction;

(v) For employer contributions in property (including stock) to plans described in subdivision (iv) of this subparagraph: In dollars in an amount equal to the fair market of such property, regardless of any conditions or limitations, any deferral in time of the employee's rights under the plan, or any other condition or restriction.

(d) Rule with respect to certain plans. Any plan described in paragraph (a) (1) of this section which fails to meet the condition of having made a payment or award during the last 3 plan years ending before November 14, 1971, shall be considered as a new plan subject to the provisions of § 201.78 and paragraphs (b) and (c) of this section.

$201.75 Incentive compensation prac

tices (other than stock options).

(a) In general-(1) Existing practices. Subject to the provisions of this section, an employer having a practice (other than a plan described in § 201.74 (a)) with respect to items of incentive compensation (but not including any plan or practice with respect to stock options) which practice does not qualify under § 201.72 (f) or (g), may continue to administer such a practice providing the following conditions are met: (i) A

payment or award has actually been granted under the practice as a matter of custom or habit during two of the last 3 practice years ending before November 14, 1971, or if the practice had been in existence less than 2 practice years ending before November 14, 1971, then during 1 practice year ending before such date; (ii) administration of the practice is clearly in accordance with demonstrated past custom or habit; and (iii) administration of the practice is in the customary manner without any deviation from such manner for purposes of circumventing the intent of the wage and salary stabilization program.

(2) New or revised practices. An employer having an incentive compensation practice (but not including any plan or practice with respect to stock options) described in § 201.78 (b) or (c) (with respect to new or revised plans or practices) and approved by the Pay Board pursuant to § 201.78 or described in § 201.79 (b) or (c) (with respect to new organizations) and reported to the Pay Board pursuant to § 201.79 shall administer such a practice subject to the provisions of paragraphs (b) and (c) of this section.

(b) Computation of allowable amount (1) Established practices. The allowable amount of any item of incentive compensation granted to the employees in a practice unit during any wage year under a practice described in paragraph (a) (1) of this section or a practice described in paragraph (a)(2) of this section to which subparagraph (2) of this paragraph does not apply shall not exceed an amount determined as follows: The base year amount plus such base year amount multiplied by the permissible wage and salary standard established in § 201.10.

(2) New or revised practices. The allowable amount of any item of incentive compensation granted to the employees in a practice unit under a new or revised practice described in paragraph (a)(2) of this section during the first consecutive 12-month period under which the plan operates shall not exceed the base year amount.

(3) Definition. For purposes of this section the term "base year amount" means (i) in the case of a practice described in subparagraph (1) of this paragraph the amount (in dollars, or where applicable, in dividend or share units) of an item of incentive compensation granted to the employees in a practice

"

unit under a practice in one of the last 3 practice years ending before November 14, 1971, or (ii), in case of a new or revised practice described in paragraph (a) (2) of this section during the first consecutive 12-month period under which such a practice operates the amount (in dollars, or where applicable, in dividend or share units) of an item of incentive compensation established by the Pay Board.

(c) Rules with respect to computation of allowable amount-(1) Deferred payments-(i) Items deferred from an earlier year. An item of incentive compensation paid to the employees in a practice unit during any wage year which was granted to any such employees during an earlier wage year shall not be considered as an item of incentive compensation for such employee for the wage year during which such item is paid.

(ii) Items deferred to a later year. An item of incentive compensation granted to the employees in a practice unit during any wage year which is deferred to a later wage year shall be considered as an item of incentive compensation for such employees for the wage year during which such item is granted.

(iii) Definition. For purposes of this paragraph an item is considered as being "granted" during the wage year in which services are performed giving rise to the obligation to pay for the performance of such services whether or not such obligation is contingent upon the performance of future services or any other condition or restriction.

(2) Excesses. If the amount of any item of incentive compensation awarded pursuant to a practice described in paragraph (a) of this section is in excess of the allowable amount with respect to such item determined pursuant to the rules contained in paragraph (b) of this section, such excess shall be deemed to be an increase in wages and salaries for the wage year the excess occurs with respect to the covered practice unit. Such excess shall be apportioned to the appropriate employee units of the employees participating in the practice unit. The amount of excess which shall be apportioned to an appropriate employee unit shall be determined as follows: The number of employees in an appropriate employee unit who are participating in such a practice unit, multiplied by a fraction, the numerator of which is the

amount of the excess and the denominator of which is the number of employees in the practice unit. Such amount shall not be allowed to increase the maximum permissible annual aggregate wage and salary rate increase with respect to an appropriate employee unit, but shall reduce the maximum permissible aggregate wages and salaries payable to an appropriate employee unit by the amount of the excess for the wage year the excess occurs. For purposes of determining the amount of any excess with respect to phantom stock awards each phantom dividend, or share unit shall be deemed to be an actual share of stock not subject to any restriction.

(3) Credits. If the amount of any item of incentive compensation granted pursuant to a practice described in paragraph (a) of this section is less than the allowable amount with respect to such item determined pursuant to the rules contained in paragraph (b) of this section, the amount equal to the difference between such allowable amount and the amount of the award granted but no more than the difference between the allowable amount and the base year amount may be used by the employer as a credit for wages and salaries payable in the wage year in which such amount which is less than such allowable amount occurs with respect to the employees participating in the covered practice unit. The amount which may be so credited shall be apportioned in the same manner described in subparagraph (2) of this paragraph providing for apportioning excesses, provided, however, such amount shall not constitute wages and salaries for the purpose of computing the amount of any increase in wages and salaries for the following wage year and shall not be allowed to increase the maximum permissible annual aggregate wage and salary rate increase with respect to an appropriate employee unit.

(4) Valuation of items of incentive compensation. Items of incentive compensation shall be valued according to the provisions of § 201.74(c) (4).

(d) Rule with respect to certain practices. Any practice described in paragraph (a) (1) of this section which fails to meet the condition of having made the payment or award required under such paragraph shall be considered as a new practice subject to the provisions of § 201.78 and paragraphs (b) and (c) of this section

(a) Existing stock options. Stock options granted to the employees in a plan unit in writing before the close of business on December 16, 1971, under a stock option plan adopted by an employer before November 14, 1971, may be exercised.

(b) New stock options under existing plans (1) Grant. New stock options under a stock option plan adopted by an employer before November 14, 1971, may be granted to the employees in a plan unit under such stock option plan but only in writing provided that: (i) The plan has been approved by the employer's stockholders pursuant to the provisions of section 422(b)(1) of the Code; (ii) the plan stipulates a maximum number of shares to be made available for stock option grants; (iii) the option price of shares may not be established at less than 100 percent of the fair market value of such shares on the date of grant; (iv) administration of the plan is in accordance with the customary manner; and (v) the aggregate shares under new stock options during an employer's fiscal year shall not exceed the number of shares determined as follows: The number of shares (adjusted to reflect stock splits and stock dividends) granted under such plan during the last 3 fiscal years of the employer ending before November 14, 1971, divided by three.

(2) Exercise. A stock option described in subparagraph (1) of this paragraph may be exercised by the employees in a plan unit under a stock option plan.

(c) Rules with respect to certain existing plans. For purposes of subdivision (v) of paragraph (b)(1) of this section if any plan is:

(1) In existence for at least 1 fiscal year of the employer ending before November 14, 1971, but less than 3 such fiscal years, the aggregate shares under new stock options granted during an employer's fiscal year shall not exceed the number of shares determined as follows: The number of shares (adjusted to reflect stock splits and dividends) granted during the existence of the plan divided by the number of such fiscal years; or

(2) In existence for less than a full fiscal year of the employer ending before November 14, 1971, the aggregate shares under new stock options granted during an employer's fiscal year shall not exceed the greater of the aggregate shares (adjusted to reflect stock splits and stock dividends) actually granted during such period of less than such a full fiscal year

72-578 0-72- 4

ending before November 14, 1971, or 25 percent of the aggregate shares (adjusted to reflect stock splits and stock dividends) authorized for stock options during the life of the plan; or

(3) In existence for 3 or more fiscal years of the employer ending before November 14, 1971, and failing to meet the conditions of subdivision (v) of paragraph (b)(1) of this section because no shares under new options were granted during the last 3 such fiscal years, the aggregate shares under new stock options granted during an employer's fiscal year shall not exceed 25 percent of the aggregate shares (adjusted to reflect stock splits and stock dividends) authorized for stock options but not granted during the life of the plan.

(d) New stock options under new plans. Any stock option plan which fails to meet the requirements of paragraph (b) of this section shall be considered as a new plan subject to the provisions of 201.78. Except as provided in paragraphs (a) and (e) of this section, stock options under such new plans shall be granted and exercised only under the terms and conditions (including aggregate shares granted) established by the Pay Board.

(e) Stock options not otherwise described in this section-(1) Grant. The grant of any stock option which is not (i) described in paragraph (a) of this section or (ii) granted under a plan described in paragraph (b) of this section or approved by the Pay Board pursuant to § 201.78 (with respect to new plans) shall be deemed to be an increase in wages and salaries with respect to the employees in the covered plan or practice unit during the wage year such option is granted.

(2) Exercise. The exercise of any stock option which is not (i) described in paragraph (a) of this section or (ii) granted under a plan described in paragraph (b) of this section or approved by the Pay Board pursuant to § 201.78 (with respect to new plans) shall be deemed to be an increase in wages and salaries with respect to the employees in the covered plan or practice unit during the wage year such option is exercised.

(3) Apportionment to appropriate employee units. Any increase in wages and salaries described in subparagraph (1) or (2) of this paragraph shall be apportioned to the appropriate employee units of the employees participating in

the covered plan or practice unit. The amount of such increase which shall be apportioned to each such appropriate employee unit shall be determined as follows: The number of employees in an appropriate employee unit who are participating in such a plan or practice unit multiplied by a fraction, the numerator of which is the amount of such increase and the denominator of which is the number of employees in the plan or practice unit.

(f) Valuation of stock options. For purposes of paragraph (e) of this section the value of a stock option (1) when granted shall be an amount equal to the value of such option at the time of grant (without taking into account any conditions or restrictions imposed under the stock option or on the stock) determined as follows: The sum of the option premium plus the excess of the fair market value of the stock under option at the time of the grant over the price of the stock under the option, and (2) when exercised shall be an amount equal to the value of such option at the time of exercise (without taking into account any conditions or restrictions imposed under the stock option or on the stock) determined as follows: The excess of the fair market value of the stock under option at the time of exercise over the sum of the option premium plus the fair market value of the stock under the option at the time of the grant. The term "option premium" means the value of the stock option. Such value shall be an amount equal to 25 percent of the fair market value of the stock under option at the time of grant without taking into account any conditions or restrictions imposed under the stock option or on the stock.

§ 201.77 Sales, commission, and production incentive plans or practices.

(a) In general—(1) Established plans or practices. Sales, commission, and production incentive plans or practices may continue to operate in accordance with their provisions provided such plans or practices were established and in effect before November 14, 1971. Such plans or practices are those which directly reflect the performance of the employee participant in the form of sales or production output. Thus, for example, an incentive award related to profits is generally not a sales, commission, or production incentive plan or practice within the meaning of this section.

(2) New plans or practices. An employer having a sales, commission, or production incentive plan or practice described in § 201.78 (c) (with respect to new plans) and approved by the Pay Board pursuant to § 201.78 or described in § 201.79 (a) or (b) (with respect to new organizations) and reported to the Pay Board pursuant to § 201.79 shall administer such a plan or practice subject to the provisions of paragraph (b) of this section.

(b) Changes in method of calculating earnings. Unless excepted pursuant to § 201.80 (with respect to employee productivity incentive plans or practices), if any change in the method of calculating the earnings of any employee in a plan or practice unit under a plan or practice described in paragraph (a) of this section results in an increase in the aggregate amount of compensation of such plan or practice unit, the amount of such increase shall be deemed to be an increase in wages and salaries for the wage year earned with respect to the covered plan or practice unit. Such increase shall be apportioned to the appropriate employee units of the employees participating in the plan or practice unit. The amount of such increase which shall be apportioned to each such appropriate employee unit shall be determined as follows: The number of employees in an appropriate employee unit who are participating in such a plan or practice unit multiplied by a fraction, the numerator of which is the amount of the increase and the denominator of which is the number of employees in the plan or practice unit.

§ 201.78 New or revised plans or prac

tices.

(a) Replacement of existing plans or practices. An employer may, without the approval of the Pay Board, adopt a new incentive compensation or sales, commission, or production incentive plan or practice replacing such a plan or practice which has lapsed or terminated on account of the operation of time and which was either in existence before November 14, 1971, or was approved by the Pay Board pursuant to paragraph (c) of this section or was reported to the Pay Board pursuant to § 201.79 (with respect to new organizations) only when such new plan or practice (1) has the same essential terms and the same formula or method of computing the aggregate amount of compensation