Company Share Option plans are usually used by large corporations to attract new talent and retain existing employees. The plans can be expensive, but they are a relatively low-cost recruitment tool.
The way the schemes work is simple: you get options that allow you to buy shares in the company at a fixed price until a certain date. If the share price goes up between then and when you exercise your option – that is, use it – then there is a big profit on top of what you would have made if you had held on to the stock anyway.
Most plans allow employees to buy shares at a few pence, or fractions of pence, each time they exercise their options. Many plans also offer “discounts,” which are basically subsidies for employees who exercise early; the idea is that it encourages people to get in there and give the share price an upward momentum sooner rather than later (which often happens).
Of course, the schemes are expensive for companies to set up. They have to offer discounts on share prices, and they need to set aside money that will be used later on to buy back the shares that people exercise their options over.
However, most companies believe that it’s worth it if it can help them retain or attract talented employees at key times in their growth. Company Share Option plans tend to be most widely used in fast-growing sectors such as technology and pharmaceuticals; they are less common in traditional industries.
There are many other benefits of company share option plans :
• High employee engagement and motivation: Many employees who join companies through company share option plans remain with the firms for a long time after they have vested.
• Enhancing corporate culture: Company Share Option Plans to create an environment of trust and integrity, wherein the management is completely honest in its dealings. For example, when employees see their chief executive officers (CEOs) purchasing stocks from the open market to meet exercise requirements, it creates a sense of camaraderie. This further strengthens company dynamics and makes Company Share Option Plans a viable retention tool for CEOs as well.
• Utilizing people’s expertise: Some companies develop business models by using the inputs provided by employees working in different functions of an organization via Company Share Option Plans. This way, an organization can gain substantial value from its employees.
• Enhancing the quality of financial reporting: Company Share Option Plans result in lower market volatility and greater market liquidity as more people buy and sell company shares. The company share prices are less sensitive to rumors and speculation during this period as well.
• Providing a valuable alternative: If the existing compensation methodologies do not meet business objectives, then Company Share Option Plans can be used as a viable alternative for building competitive advantage and rewarding key talent.