The term employee stock option plan refers to a compensation program that provides a select group of employees with the right to purchase a fixed number of shares of common stock at an attractive price and within a prescribed timeframe. Employee stock option plans can include both non-qualified stock options (NQSO) as well as incentive options.
Unlike stock purchase plans, which are considered non-compensatory and provide employees with the ability to purchase shares of the company's common stock at a discount; stock option plans are typically provided to a select group of employees the company desires to retain.
These plans provide employees with the right to acquire a prescribed number of shares of the company's common stock, at a given price, and within a certain timeframe. Generally, these plans fall into one of the following two categories:
The board of directors for Company A has granted 50,000 shares of common stock to the company's CEO. The current market price of Company A's stock is $80.00 per share, while the options price is $75.00 per share. The expected benefit period for this non-qualified stock option is one year.
The value of the option at the time of grant would be as follows:
|Current Market Value of Common Stock ($80.00 x 50,000)||$4,000,000|
|Option Price on Date of Grant ($75.00 x 50,000)||$3,750,000|
The journal entry to record the transaction would be as follows:
|Deferred Compensation Expense||$250,000|
|Paid-In Capital: Stock Options||$250,000|
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