Question

In 2019, a public compayny issued stock options to a key employee.   The options granted the right to purchase 1,276 shares at $20 per share for two years. The shares were trading at $20 per share at the time of granting. In 2020, when the market price of the shares was $42 per share, the employee exercised all the options.

Determine the impact on the employee's employment income in 2020.

Answer 1

a)Actual Share price in market in 2020 for 1276 share @ $42 per share= $ 53592

b)Employee purchase 1276 share @ $20 per share = $ 25520

Loss to company(a-b) = $ 28072

In 2019 the exercise price and the market price at grant year are same, so company doesn't book any expenses.

But in 2020 the market price is greater than exercise price so company book as expenses of $ 28072 in their books

In 2020 there in income to employee in form of share because the have buyed the shares at alower price than market value. the total gain to employee is $ 28072 which is approximately equals to 668 shares cost( @ $42 per share)

In 2020 the employee will have increase in form of share but not in form of cash nor in salary because they buy share at lower price than market price and they are not getting any cash or salary increment.