Whether you prefer a stock grant or a stock option depends on your appetite for betting. Both are passed onto employees as beyond-the-salary compensation and are meant to motivate positive performance. But a stock grant is considered a sure thing with guaranteed value. A stock option is based on the promise of company growth, meaning your stock could be worth a lot more down the road or worth nothing.
Stock grants are gifts of company stock given to an employee. Their value will go up and down according to the market and will never be worthless, unless the company takes a header into bankruptcy. Sometimes caveats are placed on these gifts, for instance an employee may have to hold on to the stocks for a certain period of time before they can be sold. The employee can then sell the stock for the fair market value.
Stock options are an incentive tool used by young companies. Employees get the opportunity to purchase the stock for the price at the time it is granted, which is presumably at the low end for a young company. If the company does well and the stock price goes up, the employee can purchase the more valuable stock at the cheaper price. For example, if they had the option to buy at $3 and the price of the stock jumps to $6, that employee could exercise the option and see 100 percent gain in value. On the other hand, if the stock value sinks below $3 then the option doesn't represent any gain in value. It's basically a bad option.
Some companies still give out stock options, but more have moved to the stock grant side. According to a 2003 study by PricewaterhouseCooper’s human resources division, the number of companies offering stock grants increased 15 percent from 2002 to 2003. This era was the beginning of a trend as large companies saw the likes of Enron managers use stock options to their advantage by unnecessarily or illegally taking risks to drive up the company stock. In addition, options were great when a tech company was still growing but not so attractive to new employees who came on board after the company already made it.
Stock grants and stock options have slightly different tax implications. With a stock option, you would pay income tax on what is called the “spread.” This is the difference in the stock price when it is first granted and when the employee exercises the stock option. For example, a company issues the stock grant at $5 and the employee buys the stock for $5 a share when it hits $10. The difference is $5 per share and is considered income by the IRS and is therefore taxed as income. Now the employee owns the shares. When the worker sells the shares on the open market, the gains are subject to capital gains taxes. Stock grants are seen as income. The IRS wants employees to pay income taxes on the grant when the stock is granted. However, if it's considered a restricted stock grant then the employee only pays when the stock vests, which means the employee has the right to sell the stock after a set amount of time. After selling the stock, any money made is subject to capital gains tax.
- Comstock Images/Comstock/Getty Images