Last week, I discussed what a stock option was and how there are two different kinds.
When an employer gives you/grants you options, it is not considered a taxable event. It’s only when you DO something with the options that you have to pay attention and figure out if it is taxable or not.
There are several other kinds of incentive compensation involving company stock:
- Stock Appreciation Rights (SARs) – provide the right to the increase in the value of a specified number of stock shares.
- Phantom Stock – when your employer tells you they are going to pay you a future bonus (in cash) equivalent to a set amount of shares. Ex: We’re going to give you a bonus equal to 100 shares of stock. This may be convertible to actual stock, depending on the conditions.
- Employee Stock Purchase Plans—these allow employees to purchase shares in the company they work for, usually at a discounted price.
Why do companies do this?
Well, for one thing, if the company is a start-up, they may not have a lot of cash flow to offer employees high salaries. Instead, they can issue employees shares of stock, and then, ideally, in the future, the company will take off and those shares would be worth a lot of money. Companies also use stock options as motivation and/or retention. If an employee is issued shares of stock, they have an incentive to work hard to make the company profitable, which will increase (theoretically) the share price of the stock. Research shows (probably, I’m not quoting any stats here) that if the person has an ownership stake in something, then they will value it more/take it more seriously/work harder to make that stake grow.
As always, if you still have questions, feel free to email me.
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