Do you want to know all the benefits of what is stock options? Keep reading the article and ask all your questions. To begin with, it is necessary to know that stock options is a kind of Long Term Incentive (ILP).
Want to better understand how incentive plans work in practice and how they can help your business? Find out below.
What is stock options?
Stock options, or Stock Option Plan, is a type of variable compensation.
Companies that adopt the concept of stock options offer their employees the stock purchase, as a remuneration model.
Usually, the sale of shares is made with lower values compared to those practiced in the market. In other words, the company benefits the employee making it easy to buy shares internally.
With the sale of the company's shares to the employees themselves, the objective is to improve the working relationship, in addition to bringing the employee closer to the company's development.
Therefore, whoever chooses to adopt the stock options wants to involve and engage employees in the company's growth, as well as improve its performance in the market.
- Variable remuneration is to benefit employees based on company results
How does stock options work?
The stock option plan, or Stock Option Plan, is most popular in the United States. In the UK, this method is still being perfected by multinationals and, more recently, by innovative startups.
Generally, companies do not offer this type of corporate benefit to any employee.
It is a type of incentive for the employee, which is aimed at managers and other employees who hold senior positions.
As mentioned at the beginning of the text, employees acquire company shares, usually at a price below the market. It is very important to know that the remuneration conditions will depend on the rules defined by each company.
The main point of stock options is that when the company grows, the benefits are also directed to employees who participate in the stock plan.
The concept of variable remuneration
Whenever companies create a mechanism to reward employees for their results we are talking about variable compensation.
On a daily basis, this amount that supplements the employee's fixed income has other names. It can be called a bonus or a bonus. However, there are different ways to apply and name the remunerations, one of them is stock options, which benefit from shares.
The more the corporation's stock prices rise, the more the company and stock option recipients earn. Therefore, a company that chooses to follow this path will certainly see improvement in the results and performance of its professionals.
This is because the stock options it has a direct impact on the employee's motivation to improve their performance and also to remain in the company.
Therefore, for stock options to be successful, the company and the employee must enter into an agreement. Some important points must be defined and documented, such as:
- how long the employee will be able to benefit;
- the conditions for the sale of shares.
- Incentive plans such as stock options generally focus on professionals with high positions
Better long term results
The stock options aim to offer additional remuneration as part of a project to retain talent in the company. That's because it's getting more difficult to hire qualified and specialized labor in some sectors.
Therefore, the model's success depends on good employee performance indicators and the company's situation in the market. Overall, the trend is improve long-term results.
Stock options in the UK
In the UK, the type of stock option remuneration began to be applied in the 1990s.
This concept came through multinationals and gradually gained ground in the corporate environment.
Now, it is possible to identify the employee stock-buying model in different sectors.
Large companies like the Grupo Pão de Açúcar, Natura, Hering and Azul already stated that they work with variable remuneration such as stock options.
O Bank of the UK it also adopted the model and recently informed that 98,000 BB employees are company shareholders.
In recent years, stock options have also gained traction as a variable compensation option within startups.
Stock options: advantages and disadvantages
Discover some advantages and disadvantages of stock options and find out if this can be an efficient solution for your company!
From the point of view of the company's owners, the main advantage of stock options is the improvement of business results, as well as establishing a closer relationship with shareholder employees.
With this incentive strategy, it's much easier to keep the employees who dominate the company's operation. In addition to improving internal engagement for better results.
With the employee owning the shares, he improves his performance in the professional performance evaluation, because he knows that the return from his work will reach him.
In possession of the shares, the employee sees himself as one of the company's owners and focuses on:
- motivate teams;
- improve internal results.
Despite the positive points, it is also necessary to talk about the disadvantages. In the case of stock options, the big disadvantage is the lack of specific legislation for this type of compensation plan. Therefore, the company that decides to apply the model must use the Corporate Law.
In this way, the company can facilitate the acquisition of shares by employees. The only problem is that the law does not define the rules for taxation, which must be set internally.
On the employee's side, the downside is that company shares are at risk of devaluation. Therefore, it is necessary to be prepared for positive or negative results.
Other solutions for your company
These were our tips on what stock options are and how to use them to reward and engage employees. Did you like it? Check out more content in this post: Incentive programs: a guide to motivate your employees.
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We hope you understand how stock options work and how it can help your business. If you want to better understand the concept of variable compensation, count on Mereo!
This content was developed by Mereo, an integrated management platform that has the right tools to align people's results with those of the organization. Keep reading other important articles on our blog and discover other solutions to improve your company's performance.
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