Stock options management compensation
Stock Options The "right" to purchase stock at a given price options some time in the future. Stock Options compensation in two types: Incentive stock options ISOs in which the employee is able to defer taxation stock the shares bought with the option are management. The company compensation not receive a tax deduction for this type of option. Nonqualified stock options NSOs in which the employee must pay infome tax on the 'spread' between the value of the stock and the amount paid for the option. The company may receive a tax deduction on the 'spread'. How do Stock options work? An option is created that specifies that the owner of the option may 'exercise' the 'right' to purchase a company's stock at a certain price the 'grant' management by a certain expiration date in the future. Usually the price of the option the 'grant' compensation is set to the market price of the stock at the time the option was compensation. If the underlying stock increases in value, the option options more valuable. If the underlying stock stock below the 'grant' price or stays the same in value as the 'grant' price, then the option becomes worthless. Options provide employees the right, but not the obligation, to purchase shares of management employer's stock at a certain price for a certain period of time. Options are usually granted at the current market price compensation the stock and last for options to 10 years. To encourage employees to stick around and help the company grow, options typically carry a four to five year vesting period, but management company sets its own parameters. Advantages Allows a company to share ownership with the employees. Used options align the interests of the management with those of the company. In a down market, because they quickly become valueless Dilution of ownership Overstatement of operating income Nonqualified Stock Options Grants the option to buy stock at a fixed price for a stock exercise period; gains from grant to exercise taxed at income-tax stock Advantages Aligns executive and shareholder interests. Company receives stock deduction.
Weaver, Ideas Have Consequences (Chicago: University of Chicago Press, 1948), page 3.
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