Employee Stock Based Compensation

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Stock based compensation is awarded as an employee benefit.
Stock based compensation is awarded as an employee benefit. (Image: stocks and shares image by Fyerne from <a href='http://www.fotolia.com'>Fotolia.com</a>)

There are many different types of employee benefits and compensation. Some employers try to provide good insurance benefits, including comprehensive medical and dental plans with flexible accounts that employees can use as they desire. Outside of the 401k, a type of retirement plan that sometimes matches employee contributions with employer stock, one of the most common types of employee benefits is stock-based compensation such as stock options or discounted shares. This type of compensation falls under specific tax laws regarding the income it produces.

Features

Stock-based compensation refers to giving employees stock benefits, awarding them shares in the company which they can sell or keep as they see fit. Typically, the employee must work for the company for several years before the stock becomes fully vested and belongs completely to the employee, but there are many different types of compensation programs. Stock options, where employees can use part of their income to buy company stock and the employer matches with a contribution of its own, is common. Other companies award stock fully to employees or offer stock at discount prices.

Function

Stock based compensation is a very popular form of employee benefit because companies believe it will help employees act more responsibly. The value of the stock is attached to the value of the company. Emloyees who own the stock will be more motivated to see the company succeed because it will increase their own earnings.

Benefits

Stock based compensation is flexible for employees. Employees usually have a choice in how much they want to buy, and if they are long-term employees, they have a chance to earn a large amount of money. Employees who retire and gain full ownership of the stock can sell it for profit or reap dividends by holding onto it. Few other forms of employee benefits allow employees to make extra profit at the end of their career so easily.

Considerations

Stock based compensation plans depend entirely on the actions of the employer. If the company fails, the stock will be worth very little on the market, and the employee may even lose money contributed to the plan in the end. Not all employees may want to invest in their company, but they may not have many other options for long-term benefits.

Warning

The stocks that employees receive must be accounted for and taxed accordingly. This can be tricky because of the many different forms of compensation plans that exist. Stock options are calculated using a fair value model that calculates the worth of the stock when it was granted, the exercise price of the option, the volatility of the stock, the dividend expected and many other factors. Nonvested stock, or restricted stock that has limiting rules regarding share trade, is simply calculated at market price, while discounted stock does not usually count as income at all.

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