Stock options constitute a powerful tool within companies to motivate employees and involve them in the success of the business. Are you interested in this form of employee participation? Then you are in the right place! This article provides an in-depth look at Employee Stock Option Plans (ESOP) and sheds light on the various opportunities that stock options can offer you.
What are stock options?
To begin, it is essential to understand the basics of stock options. Stock options are financial instruments that grant employees the right to purchase (certificates of) shares at a predetermined price during a specific period. If the shares increase in value during this period, the employee can still purchase them at the lower, pre-agreed price. Moreover, conditions can be attached to the exercise of options, making them perfect as part of a reward package.
What is a stock option plan?
A stock option plan forms the framework through which employees gain access to stock options. This plan is drafted by the company and determines the conditions under which employees can obtain and exercise stock options. The stock option plan may encompass a range of elements, such as:
- The granting criteria;
- The number of options;
- The exercise period and;
- The price at which employees can purchase the shares.
Which granting criteria can you incorporate into the stock option plan?
In principle, you are entirely free to determine the conditions yourself. There are several types of bonus schemes in which you can incorporate stock options, such as:
Performance Bonus
You set goals in advance for your employees. If they achieve these goals, they can cash in the bonus (such as stock options). This is the most commonly used bonus scheme.
Project Bonus
You allocate the project bonus at the end of a specific project. The conditions for successfully completing the project can be set in advance and linked to the bonus. This way, the team knows exactly what they need to do, motivating them to successfully conclude the project.
Ad-hoc Bonus
Lastly, you can opt for an ad-hoc bonus. This bonus can be granted at any moment, simply because you believe someone deserves it.
What are the benefits of stock options?
Stock options offer various advantages for both companies and employees. For companies, they can serve as a powerful motivator and retention tool for their employees. On the other hand, employees benefit from potential increases in the value of the shares, making them feel more engaged in the success of the company.
How do stock options work for employees?
When employees receive stock options, they are always free to exercise them and acquire (certificates of) shares or refrain from doing so. However, they are bound by the conditions set forth in the stock option plan drafted by you as the employer, such as the exercise price and exercise period. To maximize the benefits of stock options, employees must closely monitor the market price of the shares to enter at the right time.
What are the different types of stock options?
There are two main categories of stock options:
Call Options
Call options give the holder the right to purchase the shares at a pre-agreed price at a later date. Call options are usually used for employee participation since the intention is to make employees co-owners by having them purchase the (certificates of) shares.
Put Options
Put options give the holder the right to sell the shares at a pre-agreed price at a later date. At the time of buying the option, the holder already owns the share. They are later allowed to sell this share at the pre-agreed price, making it unsuitable for employee participation.
More questions?
If your curiosity is piqued and you want to know more, we at Share Council are ready to answer all your questions. For example, join our webinar, where you can ask us all your questions!