Team members:

Stock OptionseMBA 215 Group project

1. Leticia Escoto2. Darryl Manning3. Vesna Gvozdenovic

A STOCK OPTION is an offer from a company to its employees to purchase a given amount of company common stock at a given price, (often referred to as the strike price) which is typically the market price at the time the option is offered. The offer or “option” is made for a certain length of time, and as the stock price increases, the employee can purchase the stock at the strike price and realize an immediate gain.

http://en.wikipedia.org/wiki/Employee_stock_option

Classifications of Stock Options

Nonqualified Stock Options (NSO)Company earnings reduced by the amount of the spread when the option is exercisedRepresents immediate taxable income for the employee, even if the stock is not sold

Incentive Stock Options (ISO)Amount of spread can not be deducted from company earningsDoes not represent immediate taxable income when exercised, but is subject to capital gains taxes when sold

• Strike price $76.00• Market value $96.00

• Strike price $76.00• Market value $62.00

Bargain!!

Not Good!!

When the market value of a stock drops below the strike price, then the stock option is said to be “underwater”

This was the case for an employee option that was offered by Chevron in the 1990’s. For years during the option term the stock price dropped below the strike price, until finally rebounding before the option term expired.

What’s an executive to do?Senior executives are most likely to receive stock options

Currently nearly 99% of executives have stock options that are underwater

To remedy this, many companies seek to re-structure underwater stock options or re-price existing options (present a new, lower, strike price)

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/06/AR2009030603384.html

Other Stock IncentivesRestricted Stock plans- stock offered, sometimes at a discount, but possession does not take place until a criteria (such as a performance goal) is met.

Employee Stock Purchase Plans – Employees contribute a portion of earnings to purchase stock (at a discount) at the end of a given period.

Phantom Stock- Cash or stock awarded at the end of a given period based on appreciation of stock value.

Stock Appreciation Rights-Same as phantom, but employee can decide when to exercise the option

Credits:1. Wikipedia

http://en.wikipedia.org/wiki/Employee_stock_option

2. The Washington Post

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/06/AR2009030603384.html

3. National Center for Employee Ownership

http://www.nceo.org/library/option_distribution.html

4. Managers and the Legal Environment –Strategies for the 21st Century-

Constance E. Bagley, Diane W. Savage