Stock Option Plan

What is a Stock Option Plan?

A stock option plan is a type of compensation strategy that businesses use to attract, retain, and incentivise employees.

It gives employees the right, but not the obligation, to purchase a certain number of shares in the company at a predetermined price, known as the exercise or strike price, within a specified time period.

What are the benefits of creating a Stock Option Plan?

1. Employee Attraction and Retention: Stock options can make a company's compensation package more attractive, helping to attract and retain talented employees. The potential for significant financial gain if the company does well can be a powerful motivator.
2. Alignment of Interests: Stock options align the interests of employees with those of the company and its shareholders. Because employees can benefit from an increase in the stock's price, they have a direct incentive to work hard to increase the company's value.
3. Tax Benefits: In some countries and under certain conditions, stock options can provide tax advantages compared to other forms of compensation.
4. Deferred Compensation Cost: For start-ups or other companies with cash flow constraints, stock options allow them to compensate employees without needing immediate cash outlay.
5. Wealth Creation: For employees, stock options can provide the opportunity for significant wealth creation, especially if the company's stock price rises substantially.

A stock option plan, or an employee share scheme, is a contract between a company and its employees providing the employees with the right to buy company shares at a pre-determined price within a specified period.