Employee Stock Options: What You Need To Know

Posted by Nick Niesen on November 8th, 2010

Stock options are the most well-known form of long-term compensation motivations for executives in leading companies. Because of this, stock options are currently being provided to a lot of employees in many companies. Here are some things you need to know about stock options.

1) Stock options are appropriate for: small companies where growth is anticipated, and publicly-owned companies that want to provide company ownership to its employees.

2) Stock options are still popular. This is according to the National Center for Employee Ownership who reported that there are 9 million employees who participate in approximately 4,000 plans. This is in comparison to the 1 million participants a decade ago.

3) More and more companies are offering stock options to rank and file employees in addition to the executive suite. In the current environment where top talents matter a lot, offering stock options have become an effective way of luring efficient employees.

4) When implementing stock options, consider the following:

?How much stock a company will be willing to sell
?Who will receive the options
?The number of options available to be sold in the future
?If it is a permanent part of the benefit plan or merely an incentive

5) Employee stock options have two basic types. They are called the nonqualified stock options and qualified, or incentive, stock options, or the ISOs. The nonqualified stock options are usually offered to employees, while the ISOs, which are eligible for special tax treatment, go mainly to the upper management.

6) Stock options can be exercised in three different ways by: paying cash, swapping employer stock that you already own, or borrowing money from a stockbroker while at the same time selling the necessary shares to cover the costs you incur.

7) Stock options need to be exercised prudently. Otherwise, these can cause financial troubles, especially when you?re paying taxes on your profits. It?s true that you still have to pay taxes even though you decide to keep the stock you bought. The trick is not to overreach to enjoy the benefits that stock options offer.

8) Even though the ISOs are for the privileged, it doesn?t mean that nonqualified plans are regular plans. Fact is, nonqualified stock options, unlike ISOs, can be offered at a discount to the stock's market value. The nonqualified options are also transferable to children and charity, but with the employer?s permission.

9) You can maximize your profits by holding on to your stock options until they are about to expire. This allows for appreciation for your stock options and therefore, higher gains.

10) However, there may be times when you need to exercise your stock options earlier. You may do so if you are overweight on your company stock and you want diversification to ensure safety in your investments.