Stock options are team member compensation that allows employees to buy company stocks at a set price, regardless of the stock’s current market value. This set price is typically lower than the stock’s current market value, giving employees the potential to earn a profit on their options if the stock price rises.
There are two main stock options: non-qualified stock options (NQSOs) and incentive stock options (ISOs). NQSOs can be granted to any team member, while ISOs are typically reserved for top executives. Employees typically have to wait a vesting period before exercising their options and purchasing stock. This vesting period is designed to align team members and company interests, typically lasting for a few years.
Advantages and Disadvantages of Offering Employee Stock Options
A team member stock option is a benefit given to certain employees by their employers. The stock options for employees allow the team member to purchase stock in the company at a set price, usually at a discount from the current market price. The team member can then hold on to the stock or sell it immediately, depending on the stock’s performance. There are both advantages and disadvantages to offering team members stock options. The following are the advantages and disadvantages of offering employee stock options:
Advantages of Offering Employee Stock Options
- Employees become a bigger part of the company: Offering team members stock options is a great way to incentivize and reward employees for their hard work. Not only does it give employees a sense of ownership in the company, but it also aligns their interests with the company’s success.
- Decrease team member turnover: While there are many advantages to offering employee stock options, decreased team member turnover is one of the most impactful. A company that can retain its employees is more likely to be successful in the long run, as it takes time and resources to train new team members.
- Cost-effective for employers: Offering employee stock options can be a cost-effective way for employers to attract and retain top talent. By offering stock options, employers can provide employees with a tangible benefit that can help them build wealth over time.
Disadvantages of Offering Employee Stock Options
- Additional expenses: When a company offers employees stock options, they are typically doing so to attract and retain top talent. However, this can also lead to some expenses that the company may not have otherwise incurred. For example, the company may have to cover the costs of setting up and administering the stock option plan.
- Stocks are influenced by the company — not the individual employee: One of the main disadvantages is that the value of the options is influenced more by the company as a whole than by the individual employee. This can make it difficult for employees to assess the true value of their options and make informed decisions about when to exercise them.
Employees would be assured of having stock options with respect to the acquisition of shares/stocks of their employer or on the basis of certain shares/stocks already purchased by them. The option can be exercised on the employee’s expiry or date of death.