Stock Options

Many years ago stock options were rarely used as incidental benefits for top executives. Nowadays, compensating employee whit stock options has become an increasingly common practice. Before the year 1996, only the intrinsic value method was used to record these transactions. This method distorted the issuer’s reported financial condition and results of operations, which could lead to inappropriate decisions taken by investors. Followed by the increased use of employee stock options and the surrounding controversy of its recording method, on the year 1996 the fair value method was introduced to be used as an alternative to the intrinsic method and on 2004 the intrinsic value method was completely discontinued. The Fair value method represent a better approach to the benefit of financial statements users given its many advantages. Employee stock options allow employees to purchase shares of their company’s stock at a “strike” price set by the company. The employee must exercise the right to purchase these options within a specified period of time also established by the company. Usually the strike or grant price is the market price of the stock at the time the option is granted. There is usually a minimum waiting period during which the employee must remain employed by the company before the individual may exercise the option, this period is also referred to as the “vesting” period. The average vesting period is usually 3 years after the time of grant. Employee stock options works as compensation for employees in two ways. Sometimes employees are willing to accept lower wages or salaries with the expectation that the value of their stock will grow in the market and they will be able to sell these options in the future to compensate for the sacrifize. In other cases, stock options are just an additional benefit that makes working for a particular company more attractive. From the employer’s point of view, options are used as a tool to attract