Stock options and restricted stock are both stock programs companies offer to their employees. These programs are meant to act as both incentives and bonus programs, giving the employees reasons to work for a successful company and offering them the chance to earn more shares the more successful they are. However, stock programs are tied intrinsically to the welfare of the company, and changes in the market value of the shares will change how much profit employees make, no matter which program they decide upon. In general, restricted stock is not as common as stock options.
Stock options give the employee the option of buying company stock at a certain price. It is up to the company to determine this price, but once the price is set, it cannot change for that particular employee for a set term. The employee can then choose to buy stock—sometimes whenever they like and sometime at set intervals, depending upon how the stock options are set up.
Restricted stock is not bought by the employee, but instead granted to them in a process known as vesting. Restricted stock is given to employees who have stayed with the company long enough to earn them and reach the vesting period. Shares earned build up until this period, in which the stock is vested to the employee and becomes their own. Restricted stock options help increase employee loyalty, encouraging employees to stay with the company long enough to reach the vesting.
Benefits of Stock Options
Stock options are considered beneficial to the employee as the company stock rises. The employee has the opportunity to purchase shares at any time with the set price that the stock option program grants. This means that if the employee is given stock options at $5 per share and the company stock market price rises to $30 per share, they can make $25 per share when they purchase.
Benefits of Restricted Stock
When the employee receives restricted stock, they do not have to pay anything. The stock is vested in them without charge and they receive the earnings due to them. Once the stock has been vested, they can choose to sell it or hang onto it as they see fit.
Stock options depend greatly on how the company performs. If the company stock sinks below the stock option price, they the stock option is essentially worthless to the employee. Restricted stock is safer, but the employee must stay with the company long enough to earn them, and the success of the shares remains tied to the company's success.
Stock options are not taxed until they are exercised, in which case the employee must pay income tax on them and the earnings associated with them. Restricted stock requires income tax payments as well, at the time they are vested, but vesting is usually drawn out over several years, lessening the tax burden on the employee.