How Stock Options Benefit Employees and Employers

Stock options are a new age for companies to reward their employees. At first, it had only been a reward to high level executives, but as time has gone on, even normal, non-executive employees have found themselves receiving stock options from their company. Why do companies offer these stock options to their employees? Further, why would an employee want to take these stock options over getting paid more money? Before these questions can be answered, it must be understood what a stock option is.

A stock option is a company’s way of allowing you to purchase stock at a certain price agreed upon at the start of the option’s existence. Time plays a big part in stock options because you cannot start using the option until the time exercised in the agreement for the option. It is easiest to understand with an example. Assume that the employer gives the employee 50 shares of a stock to be purchased at $5.00 a share. According to the agreement, the employee can exercise this option on September 15th. When that date comes, the employee can purchase the stock and then sell the stock. Assume that the stock’s value is at $20.00 a share on September 15th. You are entitled to purchase the fifty shares of stock at the $5.00 a share because that was what you agreed upon with the company. Then you can sell those shares immediately for a $15.00 profit per share. So, for an investment of $250, you came out with a profit of $750.00. The employer is obligated by the contract to sell you the stock for $5.00; however as the employee, you’re not obligated to ever purchase the stock, especially if the stock’s value is under the price you’d have to pay.

Why exactly would a company want to offer stock options then? There are three very important reasons why a company would offer stock options. The first one is that they want to attract excellent workers. As an employee, if you’re being offered stock on top of your salary, it seems like a very good deal. It’s an even better deal if when you buy the stock from the company and then resell, you make a profit. This attracts excellent workers in the hopes of making more money on top of their salaries. However there is more beyond just the amount of money to make.

People like the idea of owning something. That’s why people would rather buy a movie rather than just rent it, because they like knowing that their money is getting them something. The same goes with stock. They like to know that they own part of the company. Because they own part of the company with that stock, they want the stock to increase. Therefore, it’s in the employee’s best interest to work as hard as possible to turn that stock into more money. It helps a company to have these motivated workers. Motivation is a key component to a successful business; therefore if your employees realize that they own part of the company, they will find a new drive to work harder.

Finally, by offering options, you keep money in the company. This is especially important to new starting companies that don’t have a lot of money to offer for bonuses and things of that nature. By offering options, the employee is getting more without the company actually losing any money. Therefore, the company is able to get the best workers without having to give our cash bonuses. Every dollar counts to a new growing business, so the ability to keep money in your company is extremely important for the growth of it.

So why use stock options? It depends on which perspective you’re in. If you’re in the perspective of the employee, the reason to purchase options is because it can allow you to make a nice profit. Your company agrees to sell you X amount of shares on a certain date for a certain price. You are not obligated to purchase these shares; however if the stock value is up, then it is in your best interest to buy the shares at the agreed price and then resell them for a nice profit. For a company, offering stock options allows you to get the best employees because they understand the chance to make a nice profit; it allows you to get the best employees because the employee feels that they have a part of the company, therefore willingly forcing them to work even harder; finally, you keep money in your company to reinvest and still offer them the bonus of having this stock option. It seems like a full proof plan. However, stock options can be risky, like any investment, and they must be handled with much care. Can they make you money? Of course, and it’s a nice cushion. However, a wise saying to be remembered is that the bigger the profit, the bigger the risk. That means that you must be ready for any risks when dealing with options, stocks, CDs, or any other investment.