Performance Stock Options
Stock options are employee benefits that allow employees to purchase stock in the company they work for. Businesses have many different types of stock option plans: for instance, some stock option plans save employees from paying hefty income taxes, while others do not qualify for tax savings. Most plans have a vesting period, or time that employees must wait before they can exercise their options and buy stock. All stock options offer employees stock at a specific price, and some, like performance stock options, are tied to specific actions within the company.
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Definition
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Performance stock options depend on a specific condition within the company. Even if the options are vested, they cannot be used until this condition is met. The condition is typically tied to company performance and may or may not be directly related to share price. However, performance stock, like other stock options, does get its value from share price. The price of the option is set, allowing the employee to buy at that price no matter the current market price. If the current market price has risen, the employee can use the option to purchase at a discount, immediately making money.
Purpose
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Performance stock options are typically granted to executives and other company leaders. They are literally linked to performance, the performance of these executives as they decide on business strategy and operation. Since executives want to make money, the options give them extra incentive to improve the company and raise stock value until the condition is met and they can use their own options. This provides a method of influence executive actions for the good of the business.
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Types of Conditions
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Performance stock option conditions vary by company. Some companies only allow them to be used when the company's stock has reached a certain value: the danger in this is that executives might push funding to rapidly increase a company's value in the short term to meet the condition but dooming the business in the long way. Other businesses use a more general condition, such as reaching a certain standing in industry ratings or bringing in a certain amount of gross revenue.
Considerations
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Companies must decide whether to offer performance stock options only to executives, or to all employees. Some plans must be offered to an entire category of employees equally. But normal employees cannot influence the company like executives can, so performance stock options for normal workers are often considered unfair. Other companies argue that even at lower levels performance options encourage employees to do the best they can.
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