Question

What is an ESO (Employee Stock Option)? Describe one reason corporations use them.

Answer 1

Employee stock options are derivative contracts given to employees and executives. ESO are call options which gives rights to employee so employee can buy company shares at specified price. Details of ESO are mentioned in employee stock option agreement. When company share price rises employee can buy them at discount.

The corporations use ESO to motivate employees and executives and if they perform well and company performance improves, company growth happens and the share price of company will rise.

ESO also helps company to retain it's employees for longer period as employee needs to be with company to exercise these ESO.