Stock Option

Stock options are a form of variable compensation, most commonly granted to executives and senior employees.

A stock option gives the employee a time-limited right to purchase company shares at a predetermined price, either on a specific date or within a set period. This strike price is typically linked to the share’s market value at the time of issuance. If the company’s share price rises above the option price, the employee can buy low and sell high, generating a financial gain. If the share price falls below the option price, the option is usually left unexercised and expires.

Various stock option models have emerged, especially in Anglo-American corporate practices, each differing in vesting periods, exercise conditions, and tax implications:

• Qualified Stock Options: Legally defined programs with favorable tax treatment.

• Non-Qualified Stock Options (NSOs): Not regulated by law; profits are taxed upon exercise and are deductible for the employer.

• Incentive Stock Options (ISOs): Taxed only when the shares are sold, provided certain legal criteria are met, such as a two-year vesting period and a mandatory one-year holding period.

• Indexed Stock Options: Tied to market indices; profit is generated only if the company’s stock outperforms the index.

• Discount Model: Option price is set at a future date based on a discount from the market price.

• Performance (Accelerated) Stock Options: Exercisable only when specific performance targets (e.g., revenue or profit) are met.

• Premium Priced Stock Options: Strike price is set above the current market price; profit is realized only with significant stock appreciation.

By 2000, nearly 60% of DAX 100 companies had implemented stock option programs—up from just 6% in 1996. Of these, some targeted only executive boards, while others extended options to first and second-tier management. However, following major declines in stock market performance, the popularity of stock options has waned.