Many companies are increasingly offering stock options to their employees. This is a new strategy that conglomerates and even small companies have adopted it to woo the skilled work force towards them. Intrigued by this new strategy, I decided to explore the working of these options and their benefits for employees and employers. My findings about this subject have been presented in the following lines as stock option basics.
A stock is a small quantum of ownership in the company. Public listed companies have their stocks traded in stock markets. The stock value is a direct indicator of the performance of the company.
What are Stock Options?
A stock option is a small number of company stocks offered to employees at a reduced or market level price, as part of company incentives. It is a chance for the employee to share the ownership of the company that he or she is helping in running. The stocks are usually offered at a price that is substantially lower than or level with their market value. The stock options are also made available to third parties as a contract.
This price at which these options are sold to employees is known as 'strike price' or 'grant'. The time period in which these stocks can be bought by employees is decided by the company. This time frame in which the employees are granted with a right to purchase stock is called the vesting period. This period may be spread over a few years. Stock options can be exercised at any point of time in this vesting period.
For Employees
For the employees, stock options are opportunities to gain assets which can be of great value for the future. They can profit from stock investing and bet on their own company performance. These stocks may come at a discounted price, compared to market value, which further benefits them. With stock options offered, an employee feels even more connected and motivated to work for that company than before. If a company is really doing well, the options become high value assets for the future. With a long vesting period, employees can buy stock whenever they can save enough in the future, which is highly convenient.
For Employers
The stock options explained above must have made it clear as to why employers prefer offering them. One prime reason is to motivate the employees and to boost their morale. It is seen as an effective way reducing the attrition rate by human resource managers. Once an employee becomes a shareholder, his interests automatically get aligned with company interests even more. Some companies in the start up phase offer stock options to employees as they are short of cash at that point. The options are offered in such a case, with the hope that as the business rises, they will be worth a lot more.
The employers have another advantage of company stock, within their inner circle, instead of it being offered to third parties. Ultimately, a skilled work force is the true asset of any company and offering stock options is one way of sharing the profits that a company makes due to their personal efforts.
Offering stock options is a very smart strategy to get the employees involved in the working of their company and literally take 'ownership'. As I see it, in the long run, these options are an effective way of retaining talented work force and is a total win/win situation for both parties.
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