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The Skinny on Employee Stock Options Comments

  • By Kelly Spors
  • January 10, 2013

Coins

Your employer probably pays you a salary. But there’s another, sometimes more lucrative, form of compensation you should know about.

For decades, companies have used stock options to tie the personal wealth of executives and employees to the performance of the company. Essentially, the more valuable the company becomes, the more valuable its stock options are.

It works like this: Options give you the right to buy (or “exercise”) a certain amount of stock at a set price over a specific time period. That price is generally whatever the stock was worth when you received the option. If the stock price goes up, you can buy it cheaper by exercising your option, then sell the shares and pocket the difference. If the stock drops, you miss out on the payoff.

Options usually vest over time—the longer you work, the more you accumulate.

Large public companies often give options to employees, but so do startups that hope to be bought or go public someday. Sometimes they’re offered instead of salary, figuring they’ll be worth far more if—a big if—the company strikes it big. (Think Google.)

So how can you get in on the action? Don’t forget about stock options when first negotiating your compensation. If you’re already in the company, find out if it offers options and to which types of employees. At your next performance review, say you want to better link your pay to company performance. 

Be sure to read the fine print on stock options (what happens if, say, the company gets bought?) And consider seeking tax advice before exercising options, to avoid a surprise from the IRS.

Opt in. Would you rather be paid in cash or employee stock options?

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