Stock option plans are a form of long-term incentive compensation typically offered to executives, granting them the right (but not the obligation) to purchase a specified number of company shares at a fixed option price—often aligned with the market price at the time of issuance, or discounted.
These rights become exercisable during a defined future period and are frequently contingent on achieving performance targets. The design of stock option plans can vary significantly in terms of key parameters, such as the subscription price, indexation, exercise conditions, timing, and allocation volume. Though the effectiveness of stock options in driving sustainable value creation remains a topic of debate, they are widely recognized as powerful tools for employee retention and motivation.
In practice, stock option plans are more straightforward to implement in public companies, where shares can be acquired on the stock exchange (up to 10%, subject to legal limitations). In non-listed companies, equivalents such as phantom stock plans or virtual shares are used to simulate ownership and returns without actual equity transfer.
From a legal perspective, various mechanisms under the German Stock Corporation Act (AktG) can be used to implement stock option plans. These include:
-
Ordinary capital increases (Sections 182–191 AktG), often involving the exclusion of shareholder subscription rights through a resolution at the Annual General Meeting.
-
Conditional capital or authorized capital increases, where the Executive Board, with Supervisory Board approval, may raise capital up to a defined amount as permitted by the Articles of Association.
Stock option plans have become a core element of executive compensation strategies, particularly in competitive markets and high-growth sectors, as a means of aligning leadership interests with long-term company performance.
« Back to Glossary Index
