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I'm not exactly sure I understand the "why" behind a Company reasoning for offering "options" to their employees to invest in itself.

I've found it is very unlikely of the employees to exercise for a long period of time and sell at a later point in time. Usually they go with the "Same Day Sell" method.

I'm curious, however, what would be the incentive for someone to "exercise" (and what would be required) their stocks, and keep them in the market for a long-term period (ex: 1 year), then sell them.

Now, from a tutorial video on E-Trade, they show that some stock option plans can result the employee (or stock holder... I believe?) earning the difference in stock price between their Granted price (ex: 10$) and the sold price ($20), which disregards the shorter-term scenario where the difference would of been calculated with the Exercise price (ex: 17$) and the sold price.

Now, depending on how well a company is doing, if a Company allows long-term investments and is doing well - does it make sense NOT to choose the "Same Day Sale" method and actually "gamble" by paying the cost to exercise the stocks for a year or more?

Final question - by investing stocks long-term, and earning much more in return (via the equations: SoldPrice - GrantPrice vs. SoldPrice - ExercisePrice), is this some form of saying: "Thank You for investing in us for such a long-time!" from the Company?

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1 Answer 1

up vote 4 down vote accepted

There are two things to consider:

  1. taxes - beneficial treatment for long-term holding, and for ESPP's you can get lower taxes on higher earnings.

  2. vesting - restricted stocks or options can only be sold/exercised years after being granted, as long as the employee keeps his part of the contract (usually - staying at the same place of works through the vesting period). This means job retention for the employees, that's why they don't really care if you exercise the same day or not, they care that you actually keep working until the day when you can exercise arrives. By then you'll get more grants you'll want to wait to vest, and so on. This would keep you at the same place of work for a long time because by quitting you'd be forfeiting the grants.

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Thanks, that sounds very much right on the money (no pun intended) with the company I work for. Job retention by means of "keeping employees via bonus money" sounds more like my current employer's approach vs. one that retains employees by means of quality and the love of their jobs. –  bigp Feb 28 '12 at 1:52

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