Question

Suppose your company offers a broad-based stock option plan for all full-time employees. Your company’s stock is publicly traded and has enjoyed growth above industry peer group levels over the last ten years. Institutional shareholders, however, have questioned the usefulness of such option plans and have raised the question with your CEO. He has asked you to prepare a list of talking points he might use with the shareholder group to justify this employee benefit. What would be on your list and how would you use data and metrics to support your conclusions?

Answer 1

Investors need to understand that Stock option plan will affect the company in not just in form of short-term earnings, but also by changing long term compensation methods and will also affect in attracting talent and motivating employees as the success of the organisation majorly depends on its employees. Following are the benefits we can measure while issuing Stock option plans to its employees.

A. The most important benefit is that it increases employee loyalty and commitment to organisation, as they became the owners with a financial stake in the company’s performance. Talented employee will be attracted to the company and will be inclined to stay in order to receive future rewards.

B. Stock options also assist the business in tax advantage. Options are shown as worthless in the books of the company until they are exercised. Even though stock options are technically a form of deferred employee compensation, companies are not required to record options pending as an expense. Once employees exercise their options, the company can take a tax deduction equal to the difference between the strike price and the market price as compensation expense.