How To Compensate Employees with Stock Options

Employees who are well-compensated tend to be more diligent and more loyal to the company. The primary form of compensation, of course, is salary. But, there are other ways to compensate employees. For instance, psychological compensation in the form of public recognition is a non-monetary way of compensation. Incentives are other means of employee compensation. They can come in the form of salary increases, cash bonuses, increased fringe benefits, stock option plans, etc.

Stock option plans, in particular, attract employees because the stock option plans offer them an opportunity to buy stocks in your company for a specified price at a specified time. As a form of incentive or employee compensation, stock option plans interest many employees because of the chance to buy stocks that are worth more than the price of the stock option plan. In short, the employees pay less for more. This article describes the manner and process of compensating your employees with stock options.

  1. Form a corporation and register as a publicly traded company. Many privately owned companies have decided to trade publicly to improve the company’s investments. Many start-up and small companies also decide to go public in order to attract more capital for expansion. Before the Initial Public Offering (IPO), make sure you launch an attractive marketing campaign about your company to public investors, as well as potential employees. Build up the company’s good image in the press.
  2. During the Initial Public Offering, present the stock option plans to your employees.
  3. Seek the board of directors’ and shareholders’ approval and adoption of the stock option plan. The success of the plan relies much on the support of the board and the shareholders.
  4. Inform current employees and potential hires about the stock shares’ success. If they know about the success of the shares, the employees - both current and prospective - will start believing that they found a deal better than simple cash compensation or a stock grant.
  5. Highlight the advantages of stock option plans compared to the advantages of other compensation plans. It is important that your employees are properly informed and educated about the benefits of stock options. Moreover, it is important for the employees to understand that stock prices are going up and that, on the day of the exercise, the shares they buy will have more value than the price they paid for the stock option plan or contract.
  6. Dangle the carrot in front of prospect employees. Stock options usually entice newcomers to join the company. More importantly, the stock option plans not only can attract fresh blood but can also attract top talent. Prospect employees will usually be enticed because they will be compensated for their services to the company and, at the same time, will become shareholders of the company, making them part-owners of the company.
  7. Consider offering stock options to employees who have accomplished or achieved much for the company. This form of incentive can spur employees to work harder in reaching company targets and goals. In effect, the company grows and becomes better.

If an employee has a sense of ownership towards his or her company, the employee tends to perform better on the job. Stock option plans not only act as incentives for good performance but also is one way to actually make employees co-owners of the company.


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