Tax Center / Global Tax Guide / Glossary / Discussion / Newsletters / About Us
Register Log in
myRecordsmyToolsmyClients
   Basics   
Core Concepts   
Benefits   
Grants   
Vesting   
Exercise   
Sales   
Valuation & Expensing   
Alternatives   
Underwater Options   

Annotated diagram of Schedule DTax errors can be costly! Don't draw unwanted attention from the IRS. Our Tax Center explains and illustrates the tax rules for sales of company stock, W-2s, withholding, estimated taxes, AMT, and more.

Basics: Benefits



Print this FAQ
Why do companies grant stock options, restricted stock, and other equity awards?

A company may grant equity awards for a variety of reasons:

  • Attracting and retaining valuable employees.
  • Motivating employees to work harder to increase the value of the company and its stock price.
  • Aligning the financial interests of employees with those of shareholders.
  • Conserving cash by paying part of compensation in stock options, restricted stock, stock appreciation rights, or other stock grants.
  • Creating an ownership culture.
  • Keeping its compensation package competitive with others in its industry and geographic area.

In the 2013 iQuantic Global Long-Term Incentive Practices Survey by Buck Consultants, the 133 surveyed companies (mostly US multinationals) gave the following as their major reasons for granting equity awards.

Reason for making equity awards Percentage of companies
Executive/employee retention 97%
Job promotion 67%
Acquisition or merger 52%
Recognition of excellent job performance 50%
One-time broad-based grant 33%
Project completion 19%
Special skill set 19%
Filing of patent 10%
Relocation/transfer 6%

The compensation/HR organization WorldatWork, along with the Performance and Reward Centre and Hewitt New Bridge Street, surveyed 844 mostly American and British companies to ascertain their use of stock plans and their attitudes toward them. (See Employee Equity Plans: Do They Have A Future?) More than half of the responding companies make stock grants to employees. Over 60% of the companies operate employee stock purchase plans. The following table shows the primary reasons that the surveyed companies cited for granting equity awards, and the percentage of companies that gave each as the primary reason for a particular type of stock compensation.

Primary reason Stock options Restricted stock/RSUs ESPPs
Align interests; get employees to focus on share price 45.28% 47.10% 61.69%
Attract & retain employees 22.64% 30.32%  7.46%
Needed for competitive rewards/benefits package 14.47% 7.10% 8.96%
Corporate culture 10.06% 3.23% 7.96%
Create wealth for employees 2.52% 3.87% 6.97%
Corporate tax efficiency 2.52% 3.23% 4.48%
Other reason 1.89% 2.58% 1.49%
Align employee awards with executive awards 0.63% 2.58% 1%

Employees' Attitudes Toward Their Stock Compensation

A Morgan Stanley survey of employees with equity awards found that 59% of the respondents regard their grants as a major part of their compensation. Even more (82%) think that operating a stock plan is a smart business move for their company. Most of the survey respondents (92%) expressed satisfaction with their companies' stock plans, and 65% praised their stock plans as "extremely or very valuable" employee benefits.

A UBS survey (UBS Participant Voice: The UBS Equity Award Value Index) presents a number of interesting findings which show that the more experience employees have with equity awards, the more they value them and are motivated by them. For example, while the survey found that at least some employees at every level of vesting experience perceive equity compensation as "a way to build wealth," more than half (55%) of the respondents with six or more vesting experiences felt this way.

Prior FAQ in list Return to list Next FAQ in list