Employee Stock Option Definition

A commonly used employee non-cash benefit offered through publicly-traded companies is an employee stock option (ESO), or call option. Often, the ESO benefit is offered only to executive-level employees. The ESO transfers non-standardized, over-the-counter options to an employee. The options are priced at the time of issuing (the so-called strike price) and give the holder the legal right to purchase a certain quantity of company common stock at some later date, using the strike price. The options are usually non-transferrable and often mature after, for example, ten years. ESOs may become immediately vested or may have a vesting period. There are numerous ways to implement the details of an ESO, so plan participants should carefully scrutinize plan details. Exercising ESO shares-e.g., using the ESO to purchase stock at the strike price-may have tax consequences. Note that if the company stock price fails to increase, the ESO might turn out to be fairly valueless.