One of the best ways to increase stockholder value is to make each employee a stockholder, and get each employee to “think like a stockholder”. This has motivated many companies to offer broad based employee stock option plans. One of the main problems for employees who are eligible for these plans, is that they don’t have the cash (or don’t want to disturb their savings or other investments) to purchase the stocks. If employees decline to purchase stock for this reason, the incentive value of the plan disappears. The solution to this problem is the “cashless” exercise option.
Through a program set up by the company (or with a specific broker) the broker lends the money to the employee to exercise the options and purchase the shares. The employee then immediately sells enough of the shares to pay for the purchase price, commissions and taxes. The employee then receives a cheque for the net difference. This only acts as an incentive if the market price is sufficiently higher than the exercise price, thus encouraging employees to work to improve the market value of the shares.
It is easy to see why “cashless” has become the most popular method of exercising stock options.
If the market is favourable, after the initial vesting or holding period, the options can be readily converted to cash with very little effort on the part of the employee. This encourages at least sporadic employee participation in corporate growth, but does not encourage employees to reap the rewards of the long-term economic growth of the corporation.
- Cashless exercise of option shares easily converts shares into freely available funds.
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