Employee stock options are one of the varied ways that a company can give incentives to employees and officers without necessarily giving them outright cash. This can be a good non-monetary compensation, because it gives employees a sense of company ownership. And being shares of ownership, it also gives employees an incentive to perform well, because the value of their stock options will depend on the performance of the business as a whole.
In effect, by giving this type of incentive to your employees, you are effectively inviting them to invest in the success of the business. And since stock options are usually non-transferrable, employees are likely to stick with your company until you meet financial success. If you are planning on offering your employees stock options, it should be a well-thought out plan to improve morale and help with productivity, and not something done out of the blue. This particular type of incentive requires careful and deliberate planning in order to weigh the pros and cons.
One of the things to remember is that a stock option is very different from the employee stock ownership plan or what corporations call ESOP. Typically, a corporation usually gives two types of stock options: one that meets the Internal Revenue Service standards and one that doesn’t. You should consult with a certified public accountant before considering issuing stock options, especially if you’re going to provide this to your employees at large.
For one, you should be able to decide how many shares of stock options to grant employees, and at what point in their employment this would be given, and at what point in the company’s issuance of shares of stock. The corporation should also conduct due diligence as to the proper price or value of the stocks, and at what given time. Be sure that you follow regulatory requirements, which ensure that a corporation does not mis-represent the value of its stock, and that employees and officers do not abuse the system by back-dating issuances or doing other arbitrary adjustments to their advantage.
You also need to determine the duration of the stock option. A common grant would last five to ten years at a maximum. There are also little details that need to be ironed out such as how the stock options will be handled should an employee leave before the initial public offering or IPO of the company. Also, there should be a provision in the event that the IPO does not occur. The attractiveness of options will generally depend on various factors such as these and one should always look into the different pros and cons.
Issuing stock options to officers and staffers is a very good incentive that both employer and employee should look forward to. While some might look at stock options as just another financial instrument, when used right the system would definitely result in better employees and an improved bottom line. Take a look at companies whose employees have made the business big, and have grown rich in the process, like Google, for instance.