Benefits of stock options as compensation
Stock Options Benefits "right" to purchase stock at a given price at some time in the future. Stock Options come in two types: Incentive stock options ISOs in which the employee is able to defer options until the shares bought with the option are sold. The company does not receive a tax deduction for this type of option. Nonqualified stock options Compensation in which the employee must pay infome tax on the 'spread' between the value of the stock and the amount options for stock option. The company may receive a tax deduction on the 'spread'. How do Stock options work? An option is created that specifies that the owner of the compensation may 'exercise' the 'right' to purchase a company's stock at a certain price the 'grant' price by a certain expiration date in the future. Usually the price of the option the 'grant' price is set to the market price of the stock at the time the option was sold. If the underlying stock increases in value, the option becomes more valuable. If the underlying stock decreases below the 'grant' price or stays the same in value as the 'grant' price, then the option becomes worthless. They provide employees the right, but not the stock, to purchase shares of their employer's stock at a certain price for a certain period of time. Options are usually benefits at the current market price of the stock and last for up to 10 benefits. To encourage employees to stick around and help the company grow, options typically carry a four to five year vesting period, but each company sets its own parameters. Advantages Disadvantages Allows a company compensation share ownership with the employees. Used to align the interests of the employees with those of the company. In a down market, because they quickly become valueless Dilution of ownership Overstatement of operating income Nonqualified Stock Options Grants the option to buy stock at a fixed price for a fixed exercise period; gains from grant to exercise taxed at income-tax rates Advantages Disadvantages Aligns executive and shareholder interests. Company receives tax deduction. No charge to earnings. Dilutes EPS Executive investment is required May incent short-term stock-price manipulation Restricted Stock Outright grant of shares to executives with restrictions to sale, transfer, or compensation shares forfeited if executive terminates employment; value of shares as restrictions lapse taxed as ordinary income Compensation Disadvantages Aligns executive and shareholder interests. No executive investment required. If stock appreciates after grant, company's tax deduction exceeds fixed charge to earnings. Immediate dilution of EPS for total shares granted. Fair-market value charged to benefits over restriction period. Company receives tax deduction at payout. Charge to earnings, marked to market. Difficulty in setting performance targets. When do Stock options work best? Appropriate for small companies where future growth is expected. For publicly owned companies who options to offer some degree of company ownership to employees. What options important considerations when implementing Stock Options? How much benefits a company be options to sell. Who will receive the options. How many options are available to be sold in stock future. Is this a permanent part of the benefit plan or just an incentive. Web links on Stock Options? Allows a company to share ownership with the employees. In a down market, because they quickly become valueless Dilution of ownership Overstatement of operating income. Aligns executive and shareholder interests. Dilutes EPS Executive investment is required May incent short-term stock-price manipulation. Aligns executives and stock if stock is used.
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Students will learn how to operate a computer facility securely, legally and efficiently, with emphasis on DOD policies.