Many businesses offer stock options, also known as share option schemes, as a benefit of working for the business. Employees are given the right to purchase stock in their company at a particular price for a certain period of time. Some stock option plans require employees to wait until they have been with the company a certain period of time before they can buy its stock. Stock option plans can increase the wealth of both the company and its employees, though they also present significant risk to both.
Increase Company Loyalty
Employees who buy shares of stock in a company might be more loyal to the company. Purchasing stock makes employees part owners of the company, so they employee might be more reluctant to quit his job and might feel motivated to do his best work. However, if an employee who hates his job purchases stock, he might feel obligated to stay in the position. He could be unmotivated or unproductive, which could impact the company's overall productivity.
Stock options initially have little or no risk for the employee. If the company offers stock at too low a price because it simply isn't valuable, the employee is free to choose not to purchase the stock. However, once the employee purchases stock, she risks losing money if the stock value plummets. If this happens, the employee might have to work longer hours or take a second job to make up for the income lost via the stock.
Offering stock options allows companies to grow without having to pay extra taxes. As of mid-2011, companies did not have to report stock options as deferred compensation when they offered them. When an employee exercises a stock option, the company might be able to take a deduction for the difference between the strike price -- the price at the time the company offered the stock option -- and the stock's current value.
Risks to Companies
If employees exercise their stock options, businesses must issue more shares of stock. The extra shares of stock dilute earnings per share, making each share of stock worth less than it was before. This is especially risky if a lot of employees have the option to purchase stock and the company's equity structure is unstable. The company might have to repurchase stock or find a way to increase its earnings to compensate for the dilution of its earnings per share.
- Reference for Business: Employee Stock Options and Ownership
- UK Business Link: Setting Up Employee Share Schemes
- U.S. Securities and Exchange Commission. "Employee Stock Options Plans." Accessed Feb. 3, 2020.
- Fidelity Investments. "Introduction to Options --The Basics," Page 22. Accessed Feb. 3, 2020.
- Internal Revenue Service. "Topic No. 427 Stock Options." Accessed Feb. 3, 2020.
- Schwab. "Employee Stock Options." Accessed Feb. 3, 2020.
- Financial Industry Regulatory Authority. "The Reality of Investment Risk." Accessed Feb. 3, 2020.
Jack Ori has been a writer since 2009. He has worked with clients in the legal, financial and nonprofit industries, as well as contributed self-help articles to various publications.