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Should I Offer Employees Stock Options?

Sarah Brooks

July 19, 2013

Stock options for employees are where the company offers employees stock in their company for a fixed price, and the employee hopes that over time the value of the company will go up and they’ll be able to cash in on those benefits.

Here, we’re taking a look at the pros and cons of offering employees stock options.

Pros of offering stock options

It makes employees more productive. How so? By offering stock options, your employees feel they are invested in the company and are a part of the bigger picture. They now have a desire to see the company succeed since it will directly benefit them.

It attracts better workers. By offering stock options, you’ll be attracting better workers. Typically, productivity remains high at companies where employees have stock options.

Tax benefits. Offering stock options provides tax benefits to both the employee and the employer. The employee pays no tax when they purchase the stock, allowing them to accumulate money virtually tax-free. The employee pays taxes when they cash in on their stocks. Companies benefit by being eligible for tax deferments or exemptions.

It allows smaller businesses to compete with larger ones. Small businesses that decide to offer stock options to their employees have just raised the bar and are now able to compete with larger companies. Employees typically prefer to work for larger corporations because of the benefits; now, they can work for a smaller company and still receive the same type of benefits and compensation.

Cons of offering stock options

You’re putting all your eggs in one basket. Basically, you work for a company and are invested in that company. If the company goes under, this puts you at a huge financial risk. With stocks, it’s always best to be diversified.

If stock goes down, company morale may go down. As a company, it’s a risk you take. If you’re company experiences a downturn, it may make employees less motivated to work and look to pursue work at other companies. Employees do not want to be invested in declining companies.

You may only be able to afford to offer stock options to higher-ups. Some companies cannot afford to offer discounted stock options to their entire staff. By only offering stock options to certain employees, this can create a negative work environment and ruin the “team” feel that most companies wish to achieve.

Added work for the company. If you offer stocks to your employees, you need to educate them on the different types of plans, different types of options and what the rules and policies are. This takes time—time away from running and operating your business.

Overall, deciding whether or not to offer your employees stock options is a decision only you can make.

Do your research and carefully weigh the pros and cons of this endeavor.

You also may want to consider offering your employees a basic investing class so they can know exactly what they’re buying and getting into.

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