The use of stock options as a compensation tool has expanded dramatically over the past decade. For example, one commentator noted that the number of employees receiving stock options grewfrom about 1 million in the early 1990s to between 7 and 10 million in 2002. This past decade also saw an expansion of options grants to a larger number and broader class of employees, unlike the past when options were primarily offered to a small number of top executives or directors.
Although options were more attractive to executives during the stock market boom than today, they remain a common form of executive compensation. There are still corporate, tax, and accounting reasons to offer stock options as compensation. But the recent collapse of Enron Corporation has also focused attention on the "cost" of options to shareholders, and prompted calls for more specific disclosures regarding the value of options granted.
It is important for benefits professionals to understand the changing trends affecting stock options so that they can respond to management, employee, and now,potentially, shareholder inquiries about option plans and alternatives. This column describes the basic structure of three widely used option arrangements—non-statutory stock options, incentive stock options (ISOs) and employee stock purchase plans (ESPPs), as well as the tax consequences of such plans and recent proposals regarding their accounting and required disclosure.
