Stock Options: what it is – Dictionary of Economics

Definition of stock options

It is understood by stock options or options on shares in its translation into Spanish, a way of remunerating the employees of a company and, especially, the directors. This form of remuneration consists of offering the possibility for directors or employees to obtain, with or without cost, shares of the company where they work at a price set in advance and which is normally lower than the market price.

Remuneration through stock options consists, therefore, in the acquisition of a purchase option (call option) by employees or managers, with an exercise price usually below the market price. Employees or managers sometimes do not pay any premium for said purchase option, since said cost is assumed by the company.

The objective of this type of incentive is to align the interests of shareholders with employees and managers, since the more the share price rises, the more both will earn.

Through remuneration via stock options, some directors can pocket significant amounts of money if the share price suffers strong revaluations.

Obtaining stock options is usually linked to medium and long-term remuneration plans, in such a way that they encourage and retain the managers of an entity.

On many occasions, the granting of options is not limited to a single exercise, but employees or managers have a stock option plan through which they receive stock options on a recurring basis as long as the company exceeds certain milestones.

The fundamental variables to be analyzed in a stock option received by a manager are: number of options, number of shares that can be acquired, price at which he has the right to buy the shares (exercise price), term to exercise the option and valuation of the stock options.

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Rafael Hurtado Coll, p.Professor of Finance at EAE Business School

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