Working long hours for a large corporation is tough, no doubt. It does, however, have its perks. Large firms often thrown in stock options and grants to sweeten the deal and motivate its employees to keep up the hard work. These forms of compensation align the priorities of workers with those of the corporation and enhance shareholder value. Options and grants, however, are very different from each other. If you have a choice between the two, it helps to know what those differences are.
A stock grant occurs when an employer pays a part or all of the compensation of an employee in the form of corporate stock. This means a bit less cash in your pocket at first, but the good news is it usually means the firm is investing in your future and wishes to employ you for many years to come. In most instances, the stock is restricted for the employee. Although the employee is the legal owner of these shares, she cannot sell them until the restrictions are lifted, at which time the shares are said to have vested. ABC Company may award its CFO 10,000 shares, for example, which will vest in two years. During those initial two years, the employee can transfer these shares to any broker for safekeeping but cannot sell them.
You can spend a lifetime studying all the various types of stock options. However, the kind that firms grant their employees is always a conventional "call option." It gives the employee the right but not the obligation to buy the company's stock at a predetermined price. If, for example, the stock is trading at $10 today and the options, which will vest in two years, allow the worker to buy each stock at $12, the employee will only exercise the options if the shares trade for more than $12 in the stock market when they vest. If the shares are worth less, it is cheaper to purchase the same stock via a regular broker.
Both stock options and grants are supposed to motivate the employee to go home later, work harder and help the company's stock appreciate. It's to the employee's advantage since the more the firm's shares are worth, the more the employee stands to gain. Both forms of compensation also discourage the employee from quitting the job until the stocks or options vest, as vesting is usually conditional upon continued employment.
Stock or option grants also allow companies to defer some of the compensation. Usually, no cash outlay is necessary until the stock or the option vests, which is a significant advantage for growing firms. Another advantage is stock grants and options cost the firm more when the stock price is high, and relatively less when the stock price is low. This is because the total value of both an options package as well as stock grant is tied to the stock price. Consequently, the employer's payment obligations mirror its financial success.
Options are risky business; they offer greater potential gains, but if things go sour, they may be worth nothing at all. A stock option allowing the holder to buy each share at $12 is worth nothing if the market price of the shares is $12, worth $1 when the stock climbs to $13, and $2 when the stock price reaches $14. In other words, small movements in the stock price can dramatically alter the total value of the package. The net worth of a stock grant, however, is far more stable and will not decline to zero unless the firm goes out of business. To balance the risk and reward profile of the compensation package, the employer may award some options along with some stock.
Hunkar Ozyasar is the former high-yield bond strategist for Deutsche Bank. He has been quoted in publications including "Financial Times" and the "Wall Street Journal." His book, "When Time Management Fails," is published in 12 countries while Ozyasar’s finance articles are featured on Nikkei, Japan’s premier financial news service. He holds a Master of Business Administration from Kellogg Graduate School.