The best and most talented employees are the ones that make household names of companies. However, it is usually expensive for new companies to attract the best talent in their industry or business. And even more so to keep them for a long time. One way of achieving this for new, promising companies is the use of an employee stock option. It must be stated though that not everyone understands what an employee stock option is. This is the goal of this article – to explain, in it’s simplest terms, what an employee stock option entails and how it can be beneficial to the parties involved.
Employee stock options are offered to employees for three main reasons and these are discussed in this article, plus some other considerations. These are (1) attracting and keeping high caliber workers, (2) aligning employees financial interests with that of the company, and, (3) used as an alternative to traditional raises and bonuses.
Besides the obvious financial gains that employees who own stock options stand to gain if the company continues to be financially successful, there are also other benefits. One of them is that an employee stock option enhances the firms’ benefits package without adding extra financial pressure on the employers. For most people, working in a company will result in having a good retirement package after many of service. Employee stock options are one of the sure ways of allowing staff to be introduced into company stock ownership. When the company does well, retirement packages are always better than if the company did not do so well. This serves a huge motivation for staff to become more committed to their retirement planning and therefore invest more in the company’s other securities available.
What you do when you are offered in an employee stock option is that if let’s say, for the sake of example, that the company’s stock is currently selling at $5 per share. The firm then decides that employees have the option to purchase shares at $10 a share within an agreed period of say 4 years. Qualified staff have this option but may not purchase the shares now since the option price is higher than the current share price. If within the four years, the company’s stocks rise above the option price, (i.e. $10) then employees may exercise their option and purchase the number of shares allowed within the contract. Employee stock options have the potential of making lots of employees wealthy if the company does well financially within the time of the contract and beyond.
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Are employee stock options all rosy without any problems? Certainly not. They are a great alternative to having none of them at all. However, their ‘valueness’ is largely affected and dependent on the company’s financial performance and how the general economy is faring. If the economic climate is good, then an employee stock option is far better than cash raises and traditional bonuses. The converse is also true. Hence introducing employee stock options is one way of increasing employee commitment, loyalty and a sense of belonging. If the company’s products or services are selling well, everybody stands to gain from the growth. The employee, therefore, has a personal sense of duty to do their quota to push the company forward. Can you imagine if you owned an employee stock option in Google, Microsoft or Apple? You are already a millionaire even if you were a mailroom staff. I trust you get the picture.
It really works when you know all the ins and outs of employee stock options. It really works when you know all the ins and outs of employee stock options. There two different types of employee stock options you need to be aware of before joining.