Stock options are an attractive option for businesses willing to create a highly incentivized working environment. By offering stock options as part of an employee’s compensation package, businesses can motivate employees and incentivize them to help the business succeed.
What Is a Stock Option?
A stock option is a contractual agreement between a company and an employee giving the employee the right, but not the obligation, to purchase a certain number of shares of the company at a predetermined price. Once the employee exercises the granted stock option, he or she then becomes the owner of those shares.
What Are Some Business Benefits of Stock Options?
Stock options offer several potential advantages to companies, including:
- Motivating employees: Offering stock options can act as an incentive guiding employees to work hard and stay with the company.
- Retaining employees: Providing stock options allows businesses to keep prized employees on board for longer.
- Lowering cash compensation: Stock options can offer a way to reduce cash compensation costs while still providing an attractive package of benefits to employees.
- Providing access to capital: By taking part in an employer’s stock option plan, employees can gain access to capital for investment or financial planning.
Are There Any Downsides to Stock Options?
Stock options pose some potential risks to the company and to the employee, including:
- Declining value: If a company’s stock price goes down, even if this was unforeseen, the stock option can become significantly less valuable than anticipated.
- Tax liabilities: When an employee exercises an option on company stock, they may owe taxes to the government on any profit generated at the time of sale.
- Risk of share dilution: Ownership and control of the company can be diluted if too many stock options are granted to employees.
Conclusion
Stock options can provide a wide range of benefits for businesses, including motivating employees, retaining them, reducing cash costs, and providing access to capital. However, there are downsides to consider, including related tax liabilities, risk of share dilution, and potential declining value of the stock option. Businesses should weigh the potential rewards and risks of stock options before implementing such a policy.