Analyze Employee Stock Options
Many companies offer their employees additional salary or wages in the form of shares of stock in the employing company. In order to analyze such stock options, you must first understand some of the jargon associated with these opportunities.
Contents
Steps
- Contact your organization’s Human Resources Department to determine whether you have the chance to become part-owner in the company by investing in its stock. You may have several options:
- Stock option plans allow employees to purchase stock from the company. Some plans are considered restricted, in that they are available only when an employee attains a certain level of tenure. Some plans have no such restrictions.This is known as an unrestricted direct grant of shares.
- You may be offered stock through an employee stock purchase plan (ESPP). In such a plan an employee will buy company stock by having the purchase money deducted automatically from his/her paycheck. This is a relatively painless way to acquire a sizeable holding over time.
- Phantom stock plans involve bonus compensation to the employee based on the number and value of virtual shares of stock credited to the employee's account.
- Similarly, "restricted stock units" result in the employee's being paid in shares, rather than cash. Such payment is triggered when the stock hits a certain value.
- "Performance shares" are tied to goals met by certain groups, company departments or individuals.
- Decide whether to exercise your stock options early. Unlike with stock issued to the general public, an employee cannot necessarily sell his/her stock whenever s/he wishes. You can exercise the option to sell early depending on the rules that your employer sets forth. If you are permitted to exercise the option early, you may wish to do so when the stock price has climbed higher than when you obtained it.
- Read reports about your company. Public companies are required by government regulations to file annual reports, which contain valuable information about the what is happening to company stock and the company in general.
Tips
- Your employer may present you with the opportunity to take part in an Employee Stock Ownership Plan (ESOP), but this is not quite the same as a stock option plan. An ESOP is a type of retirement plan. "Equity compensation plan" is the umbrella term for an employee's ability to purchase equity in the company or to be given stock upon first being hired.
- An Australian study analyzing stock options found that around 90% of a sample of 138 options were exercised early. The most common reason is an increase in dividends, which often foretells a decrease in stock price. Another cause for early exercise of stock options involves the volatile nature of stock. If employees see a stock's price rising, they may sell in order to beat what they see as an impending drop in the price of an overvalued stock.
