Stock options are a form of variable compensation typically granted to executives. They represent a right to purchase company shares at a predetermined price on a specific date or within a set period. The purchase price is established relative to the current stock price, with the expectation that the employee will profit from buying shares below the market value, which can then potentially be sold for a higher price. If, however, the stock price falls below the set price, the option is usually not exercised and expires.
In the Anglo-American business context, various types of stock options have been developed, each with unique terms, lock-in periods, conditions for exercise, and tax implications. Below are the most common models:
- Qualified Stock Option (QSO): These are government-regulated options offering tax advantages to employees.
- Non-Qualified Stock Option (NSO): These are not government-regulated, and the profits from exercising the option are subject to taxation. For the company, the profit is tax-deductible.
- Incentive Stock Option (ISO): This model allows employees to pay taxes only when the stocks are sold, not when the option is exercised. Requirements for this model include a two-year lock-in period and a one-year holding period for the shares, a purchase price not lower than the stock price at the time of issuance, and an annual volume limit.
- Indexed Stock Option: The exercise price of the option is tied to a market index (e.g., a popular stock market index). A profit can only be made if the company’s stock price increases more than the index.
- Discount Model: The option price is calculated later at a discounted rate compared to the market price.
- Performance (Accelerated) Stock Option: The right to exercise the option is contingent upon meeting specific performance goals, such as a set revenue or profit target.
- Premium Priced Stock Option: The base price is higher than the current stock price, and profits are realized only if the stock price continues to rise.
As of 2000, around 40% of companies in Germany had adopted the indexed stock option model, while another 45% relied on the isolated performance of the company’s own stock price. The use of stock options saw a significant rise from 6% in 1996 to nearly 60% in 2000 among DAX-100 companies. However, since the sharp declines in stock market values, the significance of stock options has been on the decline.
