The term Employee Stock Option (ESO) is used to describe a type of equity compensation granted by companies to their employees and executives. This type of compensation is usually awarded as part of a performance-based incentive plan. The value of the stock option depends on the company’s stock price at the time the option is awarded. It is also possible to sell an ESO before it comes into effect, in which case it becomes a cash bonus for the recipient.ESOs offer companies a means of retaining and motivating their best employees. Since many factors affect company stock prices, employees receive options based on their performance in specific areas. This motivates them to perform well and allows them to reap the benefits of their hard work. In addition, selling an ESO before it comes into effect makes sense since that’s how cash bonuses work.However, this doesn’t mean that all ESOs are immediately cashed in— some recipients choose to hold onto theirs and continue receiving benefits from their employer. Holding onto an ESO makes sense if you expect your employer’s stock price to rise significantly in the future. For example, Facebook founder Mark Zuckerberg sold his early options after his company’s value skyrocketed over time.Since ESOs increase employee loyalty, they’re very popular with employers— especially smaller companies with low profits. With low profits, every dollar counts when it comes to paying staff and running day-to-day operations. Granting an ESO incentivizes employees to do well with their current projects since they know they can pocket some extra money if things go well. This motivates them to work even harder than usual so they can meet or exceed their expectations with this form of compensation.
