Quiz 15: Employee Stock Compensation Plans

Business

Employee stock compensation plan Employee stock compensation plan is where employees are compensated for their performance by issuing them with employer's stock at lower price. However employee needs to complete certain vesting period to be eligible for the plan. The advantage to employee with accepting higher direct compensation package with no employer stock plan is that the amount of compensation received is fixed and would not depend on the appraisal of employee. Each month irrespective of vesting period employee would receive its fixed compensation. The risk to employee is that the higher direct compensation would lead to higher taxes to be paid by employees. The advantage of lower direct compensation plan with high degree of employer stock plan participation is that if the employer stock prices rise higher and higher the gain earned by employee would also be higher at lower amount. However employee will have to work very hard to earn the compensation plan and will have to complete the vesting period to be eligible for the plan.

Employer stock option plan refers to plan offered by employer to its employees under which employees are granted or allowed to purchase a certain number of company stock at a specified fixed price within a specified period of time. The employer stock plans are divided into two categories. They are- 1. Statutory Plan 2. Non statutory Plan Statutory plan  refers to the plan under employer stock option that involves special tax advantages on fulfilment of certain requirements. The most common forms of statutory plans includes incentives stock options, employee stock purchase and qualified retirement plans invested in employer's stock. Whereas,  non-statutory plan  refers to the form of employer stock plan that does not involves special tax benefit as in case of statutory plan and is governed by general tax law. The common forms of non statutory plans are restricted stock plan, current stock bonus, non qualified stock option, performance based stock option plan etc. Thus, the most prominent difference between both types of plan is the availability of special tax benefit

Employee stock compensation plan Employee stock compensation plan is where employees are compensated for their performance by issuing them with employer's stock at lower price. However employee needs to complete certain vesting period to be eligible for the plan. The personal factor which may influence the high concentration of employer stock is the risk which employee is willing to take. The price of shares of the employer could move in any direction and thus could be tremendous gain higher than direct compensation or tremendous loss. Thus, the amount of risk which employee is willing to take is important in employee compensation plan.

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