Noncompensatory stock options are a specific type of plan, a benefit that allows employees to buy company stock at a specific price within a specific time frame. Compensatory stock options are designed specifically to compensate employees and are subject to various tax laws. Companies use noncompensatory stock options to raise funds on their own. A businesses must follow very strict guidelines with creating noncompensatory stock options, but if it does so correctly, its employees receive tax benefits.
Companies typically have choices when they decide whom to offer the noncompensatory stock options to, but the choices are limited. There are only limited qualifications that employees must meet, and the company must offer the options to all employees who work for the company and fall under the qualifications, but not to those who are not employees. Often, the option will be given based on a percentage of salary or wages that applies to all employees who fall into that group.
Companies also have a choice in what type of discount from the current stock price they can offer stock options at. The higher the discount, the better the bargain for employees. However, in order to meet noncompensatory stock option requirements, discounts cannot be any greater than a reasonable offer of discounted stock to shareholders or others. This, like the availability limitations, keeps companies from granting executives special stock privileges.
Time Frame Aspects
If a stock option plan is compensatory, the company can decide when employees can exercise their options. For noncompensatory stock options, companies can only choose a time frame within a certain number of years. Employers must grant the options within 10 years after the plan is approved, and the employees must be able to exercise the option within 10 years from the time the option is granted.
When an employer creates a noncompensatory stock option, the stock plan is set aside in a separate tax category. The company cannot deduct the value of the stock as a businesses expense, but employees do not have to pay income tax on the difference between their stock price and the market price of the stock when they make a profit on it. Instead, they pay the alternative minimum tax, a lower rate that saves employees money.
Tyler Lacoma has worked as a writer and editor for several years after graduating from George Fox University with a degree in business management and writing/literature. He works on business and technology topics for clients such as Obsessable, EBSCO, Drop.io, The TAC Group, Anaxos, Dynamic Page Solutions and others, specializing in ecology, marketing and modern trends.