Stock Compensation
Stock compensation is a way corporations use stock options to reward employees. Employees with stock options need to know whether their stock is vested and will retain its full value even if they are no longer employed with that company. Because tax consequences depend on the fair market value (FMV) of the stock, if the stock is subject to tax withholding, the tax must be paid in cash, even if the employee was paid by equity compensation.
Equity Compensation
Definition
Equity compensation is a way for companies to incentivize and reward employees by using stock options or other forms of equity awards. Through this method, employees can purchase company stock at a predetermined price at a future date, thereby sharing in the company's growth and success.
Origin
The concept of equity compensation originated in the mid-20th century and was first widely used in technology companies. Over time, this incentive method has been adopted by companies across various industries, especially in startups and high-growth companies.
Categories and Characteristics
Equity compensation mainly includes the following categories:
- Stock Options: Employees have the right to purchase company stock at a predetermined price at a future date. The characteristic is that employees only need to pay the purchase price when they exercise the option.
- Restricted Stock Units (RSUs): The company promises to grant employees stock at a future date or when certain conditions are met. The characteristic is that employees do not need to pay a purchase price but must meet certain service terms or performance goals.
- Employee Stock Purchase Plan (ESPP): Employees can purchase company stock at a discount. The characteristic is that employees can accumulate purchase funds through payroll deductions.
Specific Cases
Case 1: A tech company grants each member of its core technical team 1,000 stock options with an exercise price of $10 per share. Three years later, the company's stock price rises to $50, and employees can profit $40 per share upon exercising the options.
Case 2: A startup grants a senior executive 5,000 restricted stock units, with the condition that the executive must serve the company for four years. After four years, the executive receives all 5,000 shares without paying any purchase price.
Common Questions
1. What is the exercise price? The exercise price is the price employees need to pay to purchase company stock in the future.
2. What are the tax consequences of equity compensation? The tax consequences depend on the fair market value (FMV) of the stock. If the stock is subject to tax withholding, the taxes must be paid in cash, even if the employee is compensated through equity.
