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Employee stock options usually cost less than market price |
Each form of share offering has unique advantages and disadvantages, several of which they have in common. When companies offer employees shares, the net benefit or disadvantage to that corporation is often carefully weighed before taking the decision to carry out such an endeavor.
Advantages
Tax deductibility
A
number of corporate benefits arise out of employee stock ownership
plans. Specifically, tax benefits including either tax deferral or tax
exemption. For example, according to the National Center for Employee Ownership
(NCEO), a large C-corporation that sells 30 percent of its shares to
employees can defer tax on gains from the reinvested proceeds; and in
the case of smaller S-corporations, 30 percent of total corporate income
is tax exempt from federal taxation.
Conserves cash
Additional
advantages exist to offering employees shares of a corporation through
stock option programs. For example, according to the Congressional Budget Office
(CBO), stock options help minimize compensation costs. Moreover, when
stock options are valued using an accounting method known as intrinsic
valuation, the stock options do not have to be recorded as an expense,
thereby keeping earnings numbers higher.
Improves performance
Offering stock to employees can also assist in retaining quality employees, and developing corporate pride per the Edward Lowe Foundation.
Furthermore, when employees are also substantially vested owners of a
corporation, their performance becomes more closely linked to the share
price of a corporation. For instance, if stock options have a purchase
price above current market prices, then in order to make a profit from
those stock options, the price will have to rise in the future and
possibly affect work output, quality and production in a positive way.
Disadvantages
Stock dilution
In
addition to the cost of establishing an employee share ownership
program, stock dilution can cause equity capitalization to drop.
Moreover, if an issuance of stock to a stock options plan is too large,
the diluted earnings per share for the company can become substantially
lower. This can negatively impact cash-flow per the Menke Group. This in turn can compound managerial incentive issues, cash flow and financing costs.
Managerial complications
Another
substantial disadvantage of issuing shares to employees is the price
can drop and potentially create managerial issues per Inc. Magazine.
Moreover, since one of the reasons for offering stock ownership choices
to employees is to boost morale and improve corporate culture,
employees of that company also become more exposed to market or economic
events that could have a negative affect on motivation and production. A
similar affect may occur if the stock options are not viewed as
substantial or if the performance expectations for both the corporation
and employees is unrealistic.
Limited availability
Depending
on the particular plan used by a corporation, offering shares to
employees can be limited to full-time employees only per the NCEO.
Furthermore, ESOPs are not available to partnerships and many
professional businesses according to the NCEO.
Unless a corporation is in the practice of only hiring full-time
employees, or has a structure that allows ESOPs, a benefits gap may
reduce the effectiveness of the stock offering to increase production
and ownership related objectives.
Image: Dave Dugdale, CC BY-SA 2.0
"Analyzing Financial Data"
Image: Dave Dugdale, CC BY-SA 2.0
"Analyzing Financial Data"
I've thought that employee stock options are very beneficial..after reading this article only i'he come to know about the disadvantages. good article
ReplyDeleteGabriala from Svasamsoft