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Everything You Should Know About Employee Stock Option Plans

There are many companies that use the Employee Stock Option Plan. These are to compensate, keep, and attract employees. These are contracts between a company and its employees. The contracts give employees the right to buy a specific number of the company’s shares at a fixed price. Of course, it only has a time limit. The fixed price is the grant or exercise price. Employees granted stock options aim to profit. They use their options to buy shares at the exercise price and then trade at a price higher than that.

Most companies do not grant shares of stock. They give derivative options on the stock instead. The terms of ESOs are usually in an employee stock options agreement. Employees cannot sell ESOs, unlike standard listed or exchange-traded options. Tax Services Malaysia puts taxes on ESOs at exercise. Stockholders will pay taxes if they sell their shares in the open market.

Companies offer ESOs as part of an equity compensation plan. Start-up companies find stock options helpful. They can use these to reward early employees when the company goes public. Stock options also serve as an incentive. A lot of employees stay with the company because of these. The company cancels the options if the employee leaves before they vest. ESOs do not include voting rights or dividends.

Aside from ESOs, there are other types a company may offer.

  • Restricted Stock Grants

These give employees the right to get or receive shares. They have to meet certain criteria first, like working for a defined number of years.

  • Stock Appreciation Rights or SARs

These provide the right to the increase in the value of a designated number of shares. The increase is payable in cash or company stock.

  • Phantom Stock

This pays a future cash bonus equal to the value of a defined number of shares. There is no legal transfer of share ownership. If defined trigger events occur, the phantom stock may become actual shares.

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  • Employee Stock Purchase Plans

These give employees the right to buy company shares. These are usually offered at a discounted price.

These equity compensation plans are different. But, they all give employees and stockholders an equity incentive. They make them want to build the company and share in its growth and success.

Benefits for employees

  • A chance to share in the company’s success through stock holdings.
  • Pride of ownership. Employees feel motivated and become more productive. That is because they own a stake in the company.
  • Provides a tangible representation of their contribution’s worth to the employer.
  • The plan may offer the potential for tax savings upon the sale or disposal of shares.

Benefits for employers

  • The integrated global economy has a worldwide competition for top talent. The plans let the company recruit the best and the brightest.
  • It provides lucrative financial incentives that boost employee job satisfaction and financial wellbeing.
  • In some instances, it may become a potential exit strategy for owners.