Employers sometimes offer stock options as an additional benefit on top of an employee’s regular salary as a way to attract and retain talented employees. With some planning, these stock options can mean significant extra compensation and even a way to fund retirement.
What Are Employee Stock Options?
Employee stock options are a type of compensation that businesses give to employees and executives and can offer substantial financial benefits. Rather than just giving the stock to the employees directly, they typically grant options. This gives the employees the right to buy the stock at a set price that’s generally lower than it can be purchased on the open market, but only for a specific period of time. The EOS terms are spelled out in the employee stock options agreement.
Employees are not immediately given access to all of their stock options. There is typically a four-year vesting period, where they earn the rights to 25% of the stock options each year, although the employer has the right to set up their own vesting schedule. A delayed vesting schedule is designed to keep the employee with the company for a specific number of years.
Reap the Financial Benefits of a Company That’s Thriving
A stock option gives employees the opportunity to buy a set number of shares of company stock at a specific price. The set price, referred to as the grant price, is usually the market price at the time the option is available. You have the choice to exercise that option and purchase stock at any time within a specific timeframe. If your company is thriving and stock is going up, you can purchase the shares at the original grant price and either sell them for an immediate profit or wait to see if the price will go up even further. High-level employees can sometimes even sell their options to generate six-figure profits, potentially even exceeding their salaries.
Feel More Connected to the Company
Stock options give employees the chance to have ownership and be more invested in and connected to the company for which they work. This can incentivize an employee to work harder, as they feel that their efforts directly benefit themselves. It’s also a win for the employer, as they can feel confident that shareholders will give the company their best efforts to see it succeed and be profitable.
Stock options are a great way to help fund a retirement account. With careful planning for how you will exercise and sell your stock options for the greatest profit and smallest tax liability, you can add a significant amount of additional funds for retirement each year.
If you get stock options as part of your employee compensation package, it’s important to familiarize yourself with the stock options plan and to understand any restrictions and clauses that apply. It’s also critical that you fully understand the vesting schedule and how you will be based on when you sell your options. With planning, you can make the most of your employee stock options and set yourself up for long-term success.