Stock Options - What to Opt for Essay

938 Words Dec 26th, 2014 4 Pages
Stock Options
Stock options as a term is getting a mention in almost every offer letter sent out in the present world, especially for the executives and senior management positions. According to Hall (2000), the choice, of the employee, to decide whether or not to buy the shares of the employer organization on a particular price, is a broad meaning of the term stock options. The specific price in these options is termed as the exercise or strike price. These options are given to the employee by the employer wherein there is no pre-requisite that the employee needs to buy the stocks, rather it is a matter of choice for the person. Furthermore, these options only offer its owner to earn profit by selling them at higher price, whenever there
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Lastly, the organization saves a lot of cash by not using the same as a means of compensation.
The stock plans offered to the employee can be grouped into three categories, based on the approach adopted by the company. These are (Hall, 2000) –
1. Fixed Value – As the name typically suggests, it is about offering the options of a constant value to the executive yearly, irrespective of the performance of the organization. However, the net gain or loss to the employee changes and is generally inversely proportion to the stock price movement.
2. Fixed Number – In this case the number of options given to the employee remain constant over a period of time. The employee’s earnings through the options go up if the price in the stock market increases and reduces if the same goes down.
3. Mega-grant – The third type of plan gives the receiver a large number of options in one go, rather than every year for a certain period of time. Here both the option exercise price as well as the quantity of the same are laid out at the beginning.
All the options have their own pros and cons, and how and why a plan is to be selected depends on a number of factors of the company and employee. Some of these factors are – Type of Plan
Characteristic Fixed Value Fixed Number Mega-grant
Number of Options Variable Fixed Fixed (net present value)
Value of

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