Define Employee Stock Option
Employee stock options are a popular type of business benefit that organizations offer to employees. These stock option plans are primarily designed as a type of retirement incentive to support the employee after they retire from the company. Like other types of incentives, employee stock options are based on a particular plan the business creates. This plan can either be an incentive plan with added tax benefits, or a non-qualifying plan with greater flexibility for the company.
Other People Are Reading
-
Definition
-
Stock options in general are instruments that can be used to purchase stock at a particular time for a particular price. Investors use these options to plan for the future, hedging their investment decisions and attempting to make extra money by purchasing the "right" to buy or sell stock at a price different than the current market rate. Employee options work the same way, except they are only for company stock and cannot be traded. Employees that wait until the stock price has risen far above the price listed by the option can make easy profit when they exercise the option.
Purpose
-
For the employee, the option provides a way to make money from the business even after retiring or becoming disabled (some plans also transfer to survivors in case of death). But the business has its own reason for creating the option plan. The business always receives capital when its stock is bought, even at a discount by its own employees, so stock options do raise funds for the business, as long as the company has the available shares to sell. Options also give employees an interest in company success, which may motivate them to work harder at their daily jobs.
-
Vestment
-
Organizations do not want employees to take their stock options and leave the company after only a few years of work. To prevent this, businesses create vestment periods, or periods over which the ability to use the options is granted or vested in the employee. These vestment periods can work according to different schedules. One business might require the employee to work for several years, then immediately award full use of the options. Another may award a certain percentage of option use to an employee each year until 100 percent is reached.
Taxation
-
Taxation can be a complex issue when it comes to employee stock options. In an incentive plan, employees are only taxed once, with the capital gains rate after they have used the option to buy stock, held it for over a year, then sold it. But a non-qualifying plan taxes employees when they use the option in the first place, and again when the stock is sold for extra profit, using the higher income tax rate.
-
