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Explain how the recognition of compensation expense for stock options is expensed over the vesting period....

Explain how the recognition of compensation expense for stock options is expensed over the vesting period.

Explain why an employee may decide to “exercise options” depending on fair value of the stock.

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During the vesting period the company transferred some of the amount to compensation reserve over the vesting period based on the number employees who are willing to exercise stock option.

For example a share market value is $5 and company offered 50 shares each for 10 years and the vesting period is 2 years.

Now the company need to transfer $1000 per annum to compensation reserve [i.e 50shares×($5-$1)×10/2years].At end of first year 2 employees left their option.now the company transfers remaining $600 only as they transferred $1000 in the previous year to the compensation reserve.

The options for the exercise are given to the employees to boost the companies performance and during the vesting period the fair value of the stock decreases it means the company performance decreased.Hence,the employees many not opt to exercise the option.

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