Stock Option Alternatives

Considerations and Implications for Employees

Teresa M. Cortese-Danile, EdD, CMA, CPA, and Adrian Fitzsimons, PhD, CISA, CPA, and Craig Latshaw, PhD, CMA, CPA

Employee compensation often comes in forms other than cash; for example, companies wishing to reward employees for good performance might grant stock options or restricted units. Stock options permit an employee to purchase the company's stock at a predetermined price. But employees who receive either incentive stock options (ISO) or nonqualified stock options (NSO) often exercise those options without fully comprehending the tax impact of the exercise. They also often allow stock options to expire, unaware that they have forgone an economic benefit. The ensuing discussion explains how stock options work and how employees can derive the maximum benefit from their exercise. It also examines restricted units and compares ISOs to NSOs, with respect to taxation and, more importantly, the economic impact on the taxpayer.