An employee stock option ESO is a stock option granted to specified employees of a company.

ESOs offer the options holder the right to buy a certain amount of company shares at a predetermined price for a specific period of time.

An employee stock option is slightly different from an exchange-traded option , because it is not traded between investors on an exchange.

Shareholders want to see the stock price increase, so rewarding employees as the stock price goes up over time guarantees that everyone has the same goals in mind. Vesting refers to the employee gaining ownership over the options, and vesting motivates the worker to stay with the firm until the options vest.

The firm retains an experienced manager for two additional years, and the employee profits from the stock option exercise. Since the employee owns the options for shares after two years, the manager may be able to leave the firm and retain the stock options until the options expire.

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This arrangement gives the manager the opportunity to profit from a stock price increase down the road. ESOs are often granted without any cash outlay requirement from the employee.

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This eliminates that need for the worker to purchase the shares before the stock is sold, and this structure makes the options more valuable. ESOs are an expense to the employer, and the cost of issuing the stock options is posted to the company's income statement. Dictionary Term Of The Day.

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