Employee Stock Options – How Do Stock Options Work

Employee stock options are offered to the company’s employees as a form of non-cash compensation. Employee stock options attempt to align the holder’s interest with those of the company’s shareholders.

If a company’s stock price rises, holders of the (employee) stock options generally experience a direct financial benefit, especially when the stock price rises above the exercise price of their stock options. This gives employees an incentive to behave in ways that will boost the company’s stock price.

Although employee stock options are mostly offered to members of the management team, they may also be offered to non-executive staff. Alternatively, employee-type stock options can be offered to non-employees: suppliers, (financial) consultants, lawyers and promoters for services rendered.

To find a company’s outstanding (employee) stock options you should read the accompanying notes to the share capital. In these notes (mentioned on the company’s balance sheet) you will see the number of stock options outstanding, including their exercise prices and expiry dates.

For more information about employee stock options I found an interesting article on the SEC’s website, titled: Employee Stock Options Plans which you can read by clicking the link provided.

Employee stock options should not be confused with the term “ESOP’s” or Employee Stock Ownership Plans, which are retirement plans.

For more information about employee stock ownership plans, visit the website of The National Center for Employee Ownership by clicking on the following link.


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