Employee Benefits
Stock Option Basics
By Barbara Gibson
Dec 28, 2005, 17:20

Stock option plans are employee benefit plans that were originally set up to compensate high level executives. Now, stock option plans are now commonly extended to all levels of employees, from the production floor right on up. In some industries, to attract and retain high quality employees, stock option plans have become more a necessary, rather than a “nice to have,” component of the overall reward and compensation package. In competitive labor markets, stock option plans are used as an evaluation criterion for job seekers looking to enter a company and for current employees looking at whether to stay with a company.

Employees who are compensated and rewarded for their contributions to a company are more motivated, satisfied, and productive. Employee stock option plans contribute to this motivation through company ownership. Stock options are only lucrative if the stock price increases. This creates a direct link between performance and pay and is what attracts the best and brightest to companies with these plans. As a means of sharing business ownership with employees, stock option plans have been very successful. The National Center For Employee Ownership published a study in 1998 that found companies with broad based stock option plans enjoyed a 16 percent performance increase over a three-year period.

While the presence of a stock option plan has been shown to increase performance and benefit employees as well as the company, there are some important factors to consider before implementing a plan of your own. Four important aspects of the plan to consider are who is eligible to participate in the plan, what percentage of shares will be available to the program, what specific exercise and vesting terms should be put in place, and what duration period will be most appropriate.

The answers to these questions will be largely determined by the overall purpose of the plan. Is the plan intended to improve performance in the short run or is it designed to encourage a long-term sense of pride and ownership in the company? If the goal is to encourage retention, then longer vesting periods are called for, however, if the stock option plan is being used to supplement employee benefits, then shorter and more frequent vesting might be more appropriate. Tying vesting periods directly to performance goals is a strategy that many companies are using to ensure the goal of productivity enhancement is accomplished with the stock option plan.

Whatever the specifics, stock option plans are generally considered a wise investment for employee motivation and performance. While the actual configuration of the plan is dependent on a number of variables, the most important consideration is what the plan is intended to accomplish. Once established, stock option plans are an excellent addition to the reward and compensation systems and the end result is a direct benefit for the employee and the company alike.


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