Initially offered only by cash-poor Silicon Valley startups, later on available exclusively to company senior executives, stock purchase options are now accessible to other employee groups and are becoming more and more popular in old-line manufacturing and service firms competing for top talent.
Employee stock options (ESO) is the right given to an employee to purchase shares of company stock at a set price. Because a stock purchase option is designed to reward the employees for their contribution to the company’s growth, there are usually time limits on when it may be exercised. While the potential benefits of stock option for the employees are pretty obvious, it is not always clear what’s in it for the employer.
Here are four key points outlining the advantages of offering employee stock purchase as an option:
Attracting and retaining valued employees. Offering a personal stake in the company’s financial performance attracts motivated and skillful professionals who are interested in contributing to company’s improvement and success. They are also more likely to look for a long term commitment and growth opportunities within the company.
Employee incentive to make the company do well. Naturally, an employee who owns some of the company’s profits will be more motivated and invested in the company’s future and performance. Because the company’s success (and hence success of the stock value) relies on employees achievement, workers who own shares perform more effectively and are more dedicated.
Moderate cost. The only real cost that the employer needs to bear is the cost of administrating the plan and the potential profit of selling some stocks at market value (since the employee gets to purchase it at a discounted price).
Postponed requirement for immediate capital. Employee stock options are a form of deferred compensation. It can be offered in place of a pay raise to increase company’s available cash. For new companies, it may be advantageous to lower the starting salary and commit to pay more in benefits in the future if, and only if, the company increases in value.
More articles on stock purchase options are available here