Question

Please briefly describe stock-based compensation.

Answer 1

Stock based compensation is also called the share based compensation or equity compensation this way use stock options to pay rewards for employees, executive or directors. This is basically used for motivate the employees.

this option based on buy a specific amount of shares at a predetermined price. Stock options are different from other options, it is different options than which are available to investors to buy or sell on exchange place.

The employee of the company must wait for a specific period before they can exercise this options. This waiting period is also called vesting period. This period also motivates the employee to stay with the company till the period is over.

For example,

assume that an employee is given the right to purchase of 1000 shares at $25 per share.

The options vest 35% per year over 4 years and have a term of 6 years. The employee pays $25 per share when buying the stock, regardless of the stock price, over the 6-year period.

Advantage of stock compensation options:

1.They can serve as a means of starting a savings plan.

2. By creating incentive to employees to stay longer in the company.

3. It is really helpful for the company to align the interest of employees.

4. Employees get the tax benefit.

5. Company don't pay the any cash

Disadvantage:

1. If share price is decreasing , it not useful for company to recruit or retain the employees.

2. Dilution can be very costly to share over the long run by increasing the number of shares.

3. Stick options is difficult to calculate the value.