Although work perks have withered since 2008, they are not dead. Many companies still have performance award plans, including company stock rewards. You may not yet know that your company has these, but they may be in your future so you should understand what they are and how they work, so you can be ready to receive or request them!
Although there are multiple types of awards companies can issue this post will only describe stock options and grants.
Stock options defined.
Stock options are documents which entitle selected employees to buy company stock at a certain price during a certain time-frame. Typically the documents are contracts between the company and the employee which detail the commitments of the employee to the company if they accept the option (such as the employee promises not to work for the competition for a certain number of years after they leave the company).
They are different than plans that allow employees to buy company stock at a reduced price – these are typically called employe stock purchase plans (ESPP). Walmart has (or used to have anyway) an ESPP. These plans can provide quite a bit of benefit to you as well!
A stock option has what is called a strike price – the price the holder of the option must pay to exercise the option and get the stock. If the stock’s market price is higher than the strike price, the employee gets income. If not – why exercise the option?
For instance ABC stock has a market price of 22.50 when the option is issued, so the committee writing up the award agreement makes the strike price $22.50. After a year (the vesting period in this particular agreement), the market price of the stock is $50.00. If you exercise 100 shares of your option that day – you pay $22.50 a share and get stock valued at $50.00 a share. You could then sell it for a gross profit of $27.50 per share. Of course, income taxes are due on the difference between the strike and the market price.
Types of stock options.
Incentive stock option (ISO) – you (the grantee) receive special tax consideration – typically you don’t pay tax on the option when it is exercised, but you have to hold the stock after exercise for a dictated period to qualify for the special considerations.
Non-qualified stock options (NSO) – you (the grantee) do not receive special tax consideration – typically you pay earnings tax upon the exercise of the options.
Restricted stock grant – his is basically free stock! As an employee with a restricted stock grant, you sign a contract with the company and in return, they give you a certain number of shares of stock after some time period (the vesting period).
Although the stock is earmarked for you at a future date, you cannot sell, assign, transfer or pledge the shares (hence the term restricted). You may have to pay for the grant document, but do not have to pay for the stock. The stock is typically held by a third party and upon vesting is transferred to your name Then you can do whatever you wish with the stock. Unfortunately you typically will pay income tax when the stock is unrestricted and put in your name.
Not just for C-Levels.
I was just a middle manager yet I was lucky enough to receive multiple grants of stock options. They don’t have to be just for the executives in the company.
If you work for a company with publicly traded stock, then you might get options or grants of stock someday too. Get a prospectus and read it, along with the annual report. Those should tell you if there is a performance award plan or not. If there is, you may be able to negotiate options in lieu of (or maybe even in addition to) a salary increase in coming years. Check out Dominque’s Top 5 Must-Know Negotiation Tips To Get Anything You Want to get tips on how!
Pump your company grapevine to see if others have negotiated for options, but even if they haven’t you can try to do so.
The way it worked for me was that each year for several years, the company would offer me the opportunity to accept a grant of stock options. They sent me a contract that I had to sign and return. By accepting the contract, I was promising certain behavior towards the company, then and after I left the company (such as not joining a competing company for a certain number of years after leaving this one).
Each contract had the strike price, the term (how long the grant was in effect and when it would expire), the vesting period (how long I had to wait before I could start exercising the options) and the number of shares included in the option. Usually the grant was for 1000 shares, which had to vest for a year before I could get my hands on them and the strike price was typically the market price at the time the grant documents were drafted by the company.
When I exercised the options, I got to choose whether or not to supply the money for the ‘strike’ price plus the taxes due (the difference between the strike price and the market price on the day I exercised was taxed as ordinary earned income) – or if I wanted to do a ‘cashless’ exercise. A cashless exercise consisted of my broker doing a margin sale of company stock, the company sending the stock to the broker and then the broker sending me the difference between the strike and market prices, less the taxes the broker sent back to the company and the broker commissions and fees.
Do your work perks include company stock options or grants? Can you share how your experience differed from mine or how you negotiated to get them?
This post has been written by Marie from FamilyMoneyValues.com. Be sure to visit her site if you’ve enjoyed this post.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.