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Eye on stock options

business Updated: Feb 01, 2008 22:52 IST
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An increasing number of companies are now offering stock options to their employees. This acts both as a motivation and tool for retaining them over a longer period.

Unlike earlier when the entire stock option process was just about extending benefits to the individual, now the situation is different and one need to do a lot more evaluation of the entire process. Some of the areas that require this kind of attention are:

Extent of stock option grant

The first thing to see is the extent of the stock options that are granted. There is an interesting trend here wherein a larger number of companies are going in for offering these options and some giving them to the entire staff.

A person needs to be included in the grant of the options at the first stage to get the benefit.

After that one has to determine the extent of the stock options. For example if a person gets 500 shares of a company whose market price is Rs 100, then the benefit might not be very high. This often determines the extent of the interest in the entire grant.

Fringe benefit tax

The grant of stock options has been brought under the fringe benefit tax (FBT) net. This means that companies have to pay the FBT at the specified time. The question that should be asked is whether the tax is recovered from the employee or not.

The recovery of the tax has to be brought into the benefit calculation and it might be that even after the inclusion of the tax the offer might not be so enticing.

In such a situation one has to be careful in the manner in which the entire matter is evaluated from the tax angle too.

Vesting period

The time when the option will vest is very important because this determines the time for which the person will have to wait for the benefit.

If the vesting period is very long, it means that the person will have to stay for that duration with the employer to get the benefit that will be available when the stock option are issued.

A lower vesting period is good because it is at this point of time that the person will be able to get a share of the money that they have been anticipating.

Mode of payment

The modes of payment along with the finance options that are available also become an important point for the person in the stock option. Sometimes even though the shares that are offered might be large in number but still the price could be unaffordable. At this point the different options including financing of the purchase and the mode of getting the shares would be a very important thing because this will determine the extent of the subscription.

The author is a certified financial planner.