Stock option plans are a key element of executive compensation, offering participating executives the right to purchase a certain number of company shares at a set price (often the stock price at the time the options are granted as a “discount” or as part of a compensation package) within a defined future period. These plans often include performance-based conditions, requiring the achievement of certain predetermined goals to qualify for the options.
Stock options are a type of long-term incentive (LTI), and various plan designs allow for different parameters, such as the purchase price, whether an indexation applies, exercise periods, and amounts. Their impact on value creation is widely debated, but they have become an important tool for employee retention in many companies.
In public companies, stock options are usually granted with a discount on the market price. This method is straightforward when the company is publicly traded, but in privately held firms, options are often structured as Phantom Stock Plans, which replicate the economic benefits of stock options without offering actual shares.
Legal and Structural Variations:
- Public Companies: A common approach is for the company to buy its own shares on the market (typically limited to 10% of shares).
- Private Companies: If a company is not publicly traded, it may use methods like Phantom Stock Plans to provide similar incentives.
- Capital Increases: Stock option plans may also involve conditional capital increases or authorized capital, where the company’s articles of association permit a board-approved capital increase, typically with the exclusion of shareholders’ subscription rights.
Stock options are a widely used tool for motivating and retaining top executives, especially in long-term growth strategies, though their effectiveness in driving value creation remains a subject of ongoing debate.
Source:
Lexicon of Personal ManagementÂ
Vahlens Personal Management Lexicon
