Question

Describe how a typical stock option plan works. What are some problems with a typical stock option plan?

Answer 1

A typical stock option plan is one where in the employees are given an option to purchase stocks of the company at a predetermined price and after the expiry of a certain period known as the vesting period. The price is lesser than the market price and the employees can forego the option after the vesting period if they do no wish to avail the benefit. Vesting period usually spans over 3- years where in the employees have to fulfil conditions to be able to purchase the stock options. Conditions can include that employees have to complete a minimum service period in the company say 5 years , based on the company's profit et al. Some of the problems with a typical stock option plan are:

1. The company usually sells the stock options at a rate that is lesser than the prevailing market rate and the balance is treated as an expense. The company may miss out on receiving premium on the stock when the market conditions are bullish.

2. Stock option plans may not always promote loyalty and help in employee retention as perceived.

3. Employees may not be interested in stock options as means hoarding a huge sum of investment in one mode and stock options are not very successful in that sense for companies.