What Are Employee Stock Options?

“Employee stock options” are issued by corporations to employees which help to include employees in the growth and performance of their employer and company. Stock options allow, but do not obligate, these employees to buy shares of a company.

Often, employee stock options require that an employee remain with a company for a certain amount of time. For example, I once worked for the Pepsi Bottling Group and was given employee stock options as part of my benefits package. The stock options would come into effect on June 1st of a particular year, about two years after I received the options.

As long as I was with Pepsi, I was able to maintain my stock options. As soon as I left Pepsi, I was required to cash out these options. When I was given the options, the i.p.o. price for Pepsi Bottling Group (a new entity at the time) was $16. Two years later, PBG stocks had more than doubled in value and were trading in the mid-$30’s. So when I left Pepsi just after my stock options matured, I walked away with a nice little bonus from my employee stock options.

I had friends who were at Hotels.com in their early stages of phenomenal growth. All the employees at the company were offered employee stock options at the time. Every so often, these new options would mature and employees could cash them out. Those who did were able to live large for a time. Those who didn’t ended up with a couple of hundred thousand dollars worth of stock a few years later.

So employee stock options give employees a stake in the future of the company, as well as encourage good employees to stay with the company.

Benefits of Stock Options

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There are many benefits of stock options that all employees can enjoy, even the new CEO of a company. Most corporate executives are given lucrative stock option packages. Once again, this encourages these execs to try to maximize the profits of the corporation, because their payoff is directly tied to the price of the corporation’s stock. Stock options can be bought at a pre-arranged price, and if the price of a corporation’s shares rocket up, the right to buy these stock options at that price allow you to make huge profits. This form of non-money compensation is a way to increase employee benefit packages, saving money now for the promise of big payouts later. Employee stock options for CEO-level executives can range into the millions or tens-of-millions of dollars.

Cashing Out Employee Stock Options

Cashing out employee stock options is not always the best strategy to follow. If you work for a company which looks like it’s a solid value and its stock prices should continue to go up, you should keep your employee stock options as long as possible. The idea is that you can buy these employee stock options for a certain price (sometimes even $0), so you might as well keep this advantage in your pocket. Cash out when you think the stock is at its highest value. Since most people have no idea when this would be, it’s probably best to assume good faith and your corporation will continue to prosper.

One time you absolutely cash out your employee stock options is when you have just left a corporation. If your stock options have matured, you have every right to those employee stock options. Ask your manager or human resources department about collecting the paperwork for your stock options. Usually, you’ll receive this in the mail anyway, but if you want to make sure you don’t forget to get the money on your stock options, make certain you get your paperwork ready. Often, there will be only a window of a year or so before you won’t be able to collect on your ESO package.