Share this Page URL

Lesson 2. Why Options Are Important > Placing a Value on Your Options - Pg. 7

Why Options Are Important 7 Top management often receives incentive stock options (ISOs). These options allow the company to make it worthwhile for the executive to stay employed. The tax code treats ISOs favorably if all the conditions are met by pushing the tax due into capital gains, which will almost always be a lower rate than ordinary income tax for well-paid executives. Ordinary income tax can reach 39½ percent, while capital gains are taxed at 20 percent. Highly paid managers find this tax incentive very at- tractive. I discuss taxes in greater depth in Lesson 9, "Taxes and Options," and ISOs in Lesson 6, "Nonqualified Stock Options." Caution The tax consequences of ISOs can be lost if you don't follow the tax code guidelines. Companies typically offer rank-and-file workers nonqualified stock options (NSOs). NSOs have vir- tually no restrictions on how they are structured. They have no real tax advantage for most workers. I describe NSOs in detail in Lesson 7, "When to Exercise Your Options." Options as a Motivator Do employee stock options motivate employees? There is little direct evidence one way or another. The success of an employee stock option program seems to depend on a well-coordinated com- munications program that keeps employees involved in the company's financial picture. Many com- panies use company newsletters and periodic employee meetings to educate workers on the ben- efits of stock options and stock ownership. Many companies hope the employee stock option program will help their workers think more like owners. This is similar to the goals of employee stock options for key management described earlier in Lesson 1, "Employee Stock Options." Critics of stock option plans point out that many employees exercise their options as soon as they