Question

      Employees who are compensated with restricted stock or stock options face financial risks not associated with cash compensation. Describe and compare the financial risks of these two types of equity-based compensation.

Answer 1

restricted stock

these refer to those stocks given to employees as compensastion which are not fully transferrable to them until fulfillment of certain conditions. These conditions might be anything like

• achieving targets
• company’s right to repurchase certain unvested shares in the event the employee ceases working for the company.

Here in the risk is that if in any case the condition is not fulfilled by the receiver, then the company is under no obluigation to pay such restricted stocks. Moreover the employees compensation becomes subject to certain conditions that (most often are not) may not be in his favour.

stock options

these refer to those stocks given to employees as compensation. these may be given to make employee feel the part of the company and motivate him to increase efforts to increase the profit to get more dividend. the financial risk here is that the stock provided may hold lesser market value then at price they are awarded to employees.