When you get into the echelons of the executive position, there is much more to the terms of employment than job hours, salary, job description, and basic benefits. Other items come into play, like bonuses for signing and performance, performance expectations and reviews, health and retirement benefits, commissions, reimbursements, exclusivity agreements, and termination agreements. One of the items that causes the most confusion is stock options, often referred to as just options. They are an important part of any executive compensation package for both the employer and the employee.
- Stock options refer to the substitution of stock in the company for cash as compensation. Some contracts give stock as bonus pay, giving stock to reward good performance or for meeting set goals. Other contracts may give stock as part of the retirement package. You may be able to get a higher dollar value in stock than you could by choosing cash.
- Employers like stock options because it helps them to keep more cash on hand. It is also seen as a way to encourage better performance from its executives. The better the executives perform, the more profit is generated and the higher the value of the stock. The executives' interests become the company's interests. In addition, the company is not under obligation to shell out cash for bonuses if the market takes a downturn. It can simply give away the shares that it is having trouble selling at a high rate as bonuses instead.
- Employees like stock options because they can receive more for their dollar, if the company is one that generally performs well. Stock options received in the infancy of a company can be worth a great deal of money once the company is established and profitable. Receiving stock in lieu of cash can have beneficial tax ramifications and can encourage employees to save instead of spend the money, as they could easily do with cash. Some also like the fact that they will be beneficiaries of the prudent decisions they make that increase the company's profitability.
- The number or percentage of shares received, when and how they can be cashed out, the dollar amount shares are "purchased" at, when the executive can start exercising the option, and when sole ownership of the stock transfers to the employee are typically spelled out in executive employment contracts. Limits on how much stock the employee can hold may also be spelled out in the contract, in order to prevent management from having a controlling share in the company.
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