CEO stock options are an egalitarian way for companies to build durable relationships with employees and encourage them to not be tempted to leave and join a competitor. Stock-based incentives give a good boost to employees to work harder in the interests of the company. But with a good impact of stock awards on performance, there is a catch. This feature will demystify how CEOs can use employee stock awards to motivate their workforce.
What Are CEO Stock Options?
Companies harness divergent strategies to incentivize their workers for increased productivity and efficiency. The predominant modus operandi has been cash compensation but the impact of stock-based compensation on employees has been recorded to be a better supplementary incentive.
CEO stock options are governed by the rights of employees to purchase shares in the company, over a period of time vide into vesting schedules. With employee stock awards, the workforce is entitled to a certain percentage of ownership in the company via shares.
When the company grows, the benefits of stock awards come into play. If the company profits due to the diligence of the employees, they are rewarded with more profits. This establishes loyalty between the parties.
How Do Stock-Based Incentives Work?
Stock-based incentives unburden the load of cash in the company which can be utilized in other ways. Companies offer stock options to employees because they are mutually beneficial.
A CEO stock option contract typically lists the date from when the stock awards will vest or when employees can sell the stock. The contract also states the quantum of shares that are permitted to be sold.
Customarily, a waiting period, called the ‘Cliff’ has to desist before CEO stock options vest. An employee is required to complete an ascertained duration of employment with the company before their stock-based incentives commence. This also makes the workforce retain the company as long as the benefits of the employee stock awards bequeath.
Exercising Benefits Of Stock Awards
Stock-based incentives can be exercised in 3 ways:
1. The owner of the stock options can buy shares and sell them immediately. In this case, the person has to pay for the stock, commission, fee, and tax.
2. Employees can buy stock-based compensation with cash. In this scenario too, the stock owner will need to pay commissions, taxes, and fees.
3. The individual can exercise their employee stock award and sell enough stock to cover commissions, prices, taxes, and fees and retain the remaining as company stock.
Types Of Stock-Based Incentives
There are two types of CEO stock options: Incentive Stock Options (ISOS) & Non-Qualified Stock Options (NQSOS).
An NQSOS is the most typical stock option for employees, contractors, and consultants. It is not eligible for any special tax treatment under the Internal Revenue Service.
An ISOS has specific limitations and can only be issued to employees. The limit on the aggregate value of the ISOS grant is $100,000, which can be vested in any fiscal year but must be exercised within three months of separation.
Impact Of Employee Stock Awards: Pros And Cons Of CEO Stock Options
The benefits of stock awards are not limited to staff retention and motivation. But before an employer chooses to offer stock-based incentives, they must be aware of the pros and cons of CEO stock options.
Pros Of CEO Stock Options
The financial advantages of issuing employee stock awards are beyond the obvious stated above.
1. An employer can offer a below-par salary to employees eligible for CEO stock options.
2. Companies can invest the freed-up cash in other aspects of the business.
3. Employee stock awards don’t cost anything to the employer.
4. The impact of stock-based compensation is improved productivity and stronger relationships between the parties.
Cons of CEO Stock Options
The disadvantages of stock-based incentives can be detrimental to the company’s progress.
1. High-level executives also receive stock options as compensation and they can take risky decisions to boost the stock price.
2. The value of the company’s stock can dilute in the long run.
3. An employee’s hard work has to work in tandem with the performance of his peers and supervisors. If the collective output is wavering, the compensation will also differ.
4. If the business success is not incredible, the company can land at the shorter end of the stick.
