In recent years, employers have been creative in devising compensation packages for key employees.

One of the more popular ways of compensating key employees is through a stock option plan, where employees are entitled to buy shares of a corporate employer at a predetermined price, known as the exercise price.

At a future point in time when the fair market value of the stock has increased (above the exercise price), the employees may decide to exercise their options and purchase shares of the employer by paying the exercise price.

Stock option plans provide benefits to both the employer and employees.

From the employer’s perspective, stock options are a long-term incentive to the employees that translates the employer’s success into the employees’ financial prosperity too. From the employees’ perspective, properly structured stock options may be a tax deferred and efficient form of compensation.

Stock options may be offered to employees of both public and private corporations. However, there are significant differences in the income tax treatment of stock options offered by public and private corporations.