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Questions and Answers
What is the primary purpose of shared-based options?
What type of shared-based option gives employees the right to purchase a specified number of shares at a specified price?
What is the term for the predetermined price at which employees can purchase shares?
How are shared-based options typically treated for accounting purposes?
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What is a potential drawback of shared-based options?
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What determines when options can be exercised?
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What is the term for the date on which options are granted to employees?
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Why are shared-based options attractive to employees?
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Study Notes
What are Shared-Based Options?
- A type of employee compensation plan
- Allows employees to purchase or receive a certain number of shares of company stock at a predetermined price (strike price)
Types of Shared-Based Options
- Stock Options: give employees the right to purchase a specified number of shares at a specified price
- Stock Appreciation Rights (SARs): give employees the right to receive the appreciation in value of a specified number of shares
- Restricted Stock Units (RSUs): grant employees a certain number of shares, subject to vesting conditions
- Performance-Based Options: vesting is tied to specific performance metrics or goals
Key Characteristics
- Strike Price: the predetermined price at which employees can purchase shares
- Vesting Period: the time period during which options vest and become exercisable
- Expiration Date: the last date on which options can be exercised
- Grant Date: the date on which options are granted to employees
Accounting and Tax Treatment
- Expensed: companies recognize the cost of shared-based options as an expense on their income statement
- Taxable: employees may be subject to tax on the value of the options at the time of exercise or vesting
Benefits and Drawbacks
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Benefits:
- Aligns employee interests with those of shareholders
- Attracts and retains top talent
- Can be a cost-effective way to compensate employees
-
Drawbacks:
- Can lead to over-reliance on options as a form of compensation
- May dilute earnings per share
- Can create complexity in financial reporting and tax compliance
Shared-Based Options
- A type of employee compensation plan that allows employees to purchase or receive company stock at a predetermined price (strike price)
Types of Shared-Based Options
- Stock Options: grant employees the right to purchase a specified number of shares at a specified price
- Stock Appreciation Rights (SARs): give employees the right to receive the appreciation in value of a specified number of shares
- Restricted Stock Units (RSUs): grant employees a certain number of shares, subject to vesting conditions
- Performance-Based Options: vesting is tied to specific performance metrics or goals
Key Characteristics
- Strike Price: the predetermined price at which employees can purchase shares
- Vesting Period: the time period during which options vest and become exercisable
- Expiration Date: the last date on which options can be exercised
- Grant Date: the date on which options are granted to employees
Accounting and Tax Treatment
- Shared-based options are expensed as a cost on the company's income statement
- Employees may be subject to tax on the value of the options at the time of exercise or vesting
Benefits and Drawbacks
Benefits
- Aligns employee interests with those of shareholders
- Attracts and retains top talent
- Can be a cost-effective way to compensate employees
Drawbacks
- Can lead to over-reliance on options as a form of compensation
- May dilute earnings per share
- Can create complexity in financial reporting and tax compliance
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Description
Learn about shared-based options, a type of employee compensation plan that allows employees to purchase or receive company stock at a predetermined price.
