Employee Stock Options Explained

Employee Stock Options Explained

Employee stock options is a method of awarding ace performers financially. This article will help you understand how stock options work and their benefits.
Employee stock options are given by privately, as well as publicly, held companies to retain quality professionals in the company. There are several rules and regulations regarding granting stock options to employees which companies have to follow. The entire process has to be executed professionally, under the guidance of experienced finance managers and executives.

What are Employee Stock Options?

A small number of the company's stocks are awarded to the employees at a reduced, or at the market price at which the company's stock is trading in the stock market. The number of shares allotted to them will depend on their post in the company. For example, senior level employees, such as chief executive officers, executive directors, directors and general managers will get more shares in the scheme as compared to mid and junior level managers. In financial terms, the attractive price at which the stocks are offered to the company's employees is known as strike price whereas the period in which the stocks are purchased by the employees from the company is known as the vesting period.

The concept of employee stock options in any finance books will mention the benefits of these stock options to employees as well as employers. For them, it can be a valuable long-term investment which can give potential returns. If the company's financial performance continuous to be good, then the employees will be able to monetize their stock by selling it at a very high valuation going ahead. The employers will be able to satisfy employees with such schemes, and this will result into increased productivity and efficiency which will benefit them greatly.

Tax Implications
The taxes for employee stock option plan are lesser than those for the standardized options. However, most employees are suggested that they hold their stocks for over a year to avoid paying huge amount of taxes. Taxes can be over 42% if you sell your stocks before the first year of issue.

Are Stock Options Always Advantageous?
Stock options can be advantageous, provided you have the capacity to hold on the stock for a longer term. This is because stock price appreciation can take place only when the company posts excellent financial results. This surely takes time and so, it may happen that your company's stock languishes and is not bought heavily by investors. Also, bad performance on the business front can decrease the amount of returns generated through stock sale.

Stock Options Issues
There have been some critics of the stock option plan. People feel that the senior management might end up getting most of the benefits of these stock option plans and the lower level employees may remain unsatisfied. So, for looking after the interests of all employees, critics recommend equal profit sharing plan.

Types

The U.S. Securities and Exchange Commission has laid down rules and regulations regarding offering of employee stock options. Here are some of the types they are available in.

Reload Options
The stock market is volatile and sometimes, you do not get expected returns due to lack of investor confidence in the market. However, in cases of a falling market, you should not sell your stocks in panic and lose the opportunity of earning well in times of a boom in the market. The reload option facility helps you to do this exactly. Even if the current market price of the stock is above the strike price, you can still hold on to the stock, and also get a new option having the same date of expiry. In this case the strike price would be the current market price (CMP) of the stock. You are free to sell off the shares when you feel you are getting the best valuations.

Statutory Stock Options
Statutory stock options are those stock options which can be issued only at or above the strike price. Some other conditions by the Securities and Exchange Commission include non-exercising of the option received for one year after receipt of stock, and also satisfying the condition of at least one year of employment in the firm issuing stock. Sale of stocks by the employees and the profit earned from this activity comes under the 'capital gains tax'.

Non Statutory Options
Non statutory options are much difference than the statutory options as there are no capital gains issues here. You can get benefit of the non statutory options by using the cashless facility in which you approach a broker who buys the stock for you with his funds and then sells of the shares at the prevalent market price in the market. So, this is indeed a brilliant method of getting profits from employee options without having to pay from one's own pocket. The only expense for the person would be the fees charged by the broker to render his services.

Top firms are known to be quite generous when it comes to granting stock options. So, by becoming a senior officer in a reputed firm, you will be able to reap most benefit of this excellent scheme and create a lot of wealth. At this point, I would like to sign off by wishing you all the best for your career.
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