Stock Options from Employers to Executives and Employees

STOCK OPTIONS FROM EMPLOYERS TO EXECUTIVES AND EMPLOYEES MONDAY, NOVEMBER 22, 2010 Employers give executives and employees the option to purchase shares of the company's stock during a specified time at a price the employer specifies (money.howstuffworks.com). There are several reasons employers may allow their executives and even employees the opportunity to purchase shares of stock: (1) It attracts and keeps good employees; (2) they wish their employees to feel like owners or partners in the company; and (3) to hire skilled employees that offers them more compensation than just a salary (money.howstuffworks.com). The benefits to employers allowing employees to purchase shares of its company stock are to motivate the employees in the hope that they will not only accept the job, but also stay on. These stock options promise potential cash in addition to a salary (money.howstuffworks.com). The company usually sets a grant, or strike, price that is discounted that is usually the market price at the time the employee purchases the stock (money.howstuffworks.com). Until these options can be exercised at a later date, it is with the hope that the price of the shares will go up and be sold at a higher market price in order to yield a profit (money.howstuffworks.com). First, the employee will convert options to stock at say, $5 a share, then sell the stock after the initial waiting period in the option's contract (money.howstuffworks.com). If the employee sells 100 shares, the profit gained at $5 share is $500. The employee can also sell some stock and save some to sell later. And last, the employee can keep the stock options with the chance to sell later--although their is no guarantee that there will any chance to make a profit (money.howstuffworks.com). When an employee makes the choice to purchase stock in their company, there is the vesting period, when the company lets the employee spread out the vesting period over a three, five, or ten year span purchasing so many shares of stock according to a schedule (money.howstuffworks.com). If a company lets an employee purchase 100 shares over a four-year period, the employee would purchase 1/4 the first year, another 1/4 the second year, another 1/4 the third year, and the final 1/4 the fourth year (money.howstuffworks.com). The employee would keep doing this each year the hope that the stock would keep going up each year. One important thing to remember is that these stock options usually have an expiration date (money.howstuffworks.com). The employee can exercise these options beginning on a certain date and ending on a certain date, and if they don't exercise these options within that expiration date, they will lose them (money.howstuffworks.com). If the employee leaves the company, they can only exercise the vested options; then they can also lose any future vesting (money.howstuffworks.com). Overall, stock options do have a risk, and may not always have a better cash compensation should the company not be successful (money.howstuffworks.com). RESOURCES money.howstuffworks.com › ... › Financial Planning