Employee Stock Options

Benefiting from company-issued stock

In today's competitive business climate, companies use every tactic available to recruit and retain competent, talented employees. One of the more popular methods in recent years has been the use of employee stock options. ESOs are the currency that companies use to compete in the world of recruiting. Prospective candidates consider stock options to be an indication that a company is serious about growth and when they come to work for that company, they will be partners in that growth rather than simply employees. Whether a company is public or private, ESOs are a benefit worth offering.

Once upon a time stock options were something only for CEOs and other higher-ups in the executive suite. Not any more. In the last decade, the use of stock options has risen dramatically as corporations realize employees of all kinds are worthy of them. It's believed that 15 percent of public companies have some sort of ESO plan in place for their employees with as many as 10 million Americans receiving this benefit.

What exactly is a stock option?

A stock option gives an employee the right to buy their company's stock at a certain fixed price for a certain number of years. The price set is usually equal to the price on the day the options were granted to the employee. The general idea behind the ESO is for the employee to hold the company stock for a number of years, selling some or all at a later date for more than the option price.

There are two kinds of stock option plans: non-qualified or non-statutory stock options and qualified or statutory stock options. Non-qualified ESOs generally don't qualify for favorable tax treatment under sections 422 and 424 of the Internal Revenue Code. Qualified ESOs are those that do. The main difference between the two options is the rate at which any gains are taxed: non-qualified gains are taxed as regular income whereas qualified ones are taxed as capital gains, resulting in a lower rate. Either way, they'll add to your bottom line.

A common assumption about stock options is that they are a thing of the past. They were only a product of the technology boom of the late 1990s. Nothing could be further from the truth. Most large, publicly traded companies use some form of ESO to reward employees. In fact, it's believed that employees with stock options earn on average 7 percent more than employees without.

Employee productivity is vital to corporate success and the ESO is still one of the best ways to ensure this takes place.

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