Question

what is a stock option that organizations issue? What are some of the types of options available?

Answer 1

Stock options or ESOPS are the incentives in the form of part of the compensation between an employer and the employee that have the company's stock as an underlying. These stocks options are typically call option, with their strike price which can be the market price prevailing at the time of allotment or can be at a certain discount to the market price. As the stock price grows, the employee has the option to exercise the stock options, thus en-cashing the profit ie. Spot price which exercising - Strike Price at which option was allotted. Employers issue these options to encourage employees work efficiently and add to the growth of the company which would increase the expected profit from the options.

Stock options can be issue in various types:

Non-leveraged Stock options - In this, the option is directly funded by the employer's cash or stock reserves. These options are tax-deductible for the company. The employee is given a vesting schedule and the stocks accumulate until the employee leaves or retires from the organization.In this case, there is no dilution of the existing shareholders.

Leveraged ESOP - Unlike Non-leveraged stock options, these provide the company tax advantages as these options are funded by borrowed funds to acquire employer's stocks. Even in this case, there is no dilution of the existing shareholders.

Issuance ESOP - In this case, financing is used to acquire newly issued shares. Due to the newly issued shares, there is a dilution of the existing shareholders. Shares acquired are allocated to the employee's accounts as the loan is repaid. During this process, the shares are released into a suspense account. Here, there is a repurchase liability due to the retirement benefits which occurs in future in the stock option plan.