Stock awards: Overview, definition, and example
What are stock awards?
Stock awards are a form of compensation provided by a company to its employees, executives, or other stakeholders in the form of company stock or stock options. These awards are often used as incentives to align the interests of the employee with those of the company, encouraging long-term commitment and performance. Stock awards can take various forms, including restricted stock, stock options, or performance-based stock units. Typically, stock awards are subject to certain conditions, such as vesting periods or performance goals, before they can be fully owned or exercised by the recipient.
Why are stock awards important?
Stock awards are important because they serve as a powerful tool for attracting, retaining, and motivating talent. By offering employees a stake in the company’s success, stock awards can encourage them to work towards the company’s long-term growth and profitability. Additionally, stock awards can help companies conserve cash by providing non-cash compensation, while employees benefit from potential appreciation in the value of the company’s stock. Stock awards also allow companies to reward high performers and incentivize executives to meet specific performance targets or milestones.
Understanding stock awards through an example
For example, a technology company offers its employees stock awards as part of their compensation package. The company grants 1,000 shares of restricted stock to an employee, which will vest over a period of four years, meaning the employee will earn ownership of 250 shares per year. If the employee remains with the company and meets certain performance goals, they will receive the full 1,000 shares. These shares can be sold or retained depending on the company’s stock performance.
In another example, a company might offer stock options to its executives. The options allow the executives to buy company stock at a set price in the future (often lower than the market price). If the company’s stock increases in value, the executives can exercise the options to purchase the stock at the set price, selling it for a profit.
An example of a stock award clause
Here’s how a stock award clause might appear in an employee contract:
“The Employee is granted [X] restricted stock units (RSUs) in the Company, which will vest over a period of [Y] years, subject to the Employee’s continued employment and performance conditions. The RSUs will be converted into shares of common stock upon vesting and may be subject to additional terms as outlined in the Company’s stock award plan.”
Conclusion
Stock awards are a key component of employee compensation packages, offering both a financial incentive and a sense of ownership in the company. These awards help align the goals of employees with the long-term success of the company, motivating them to perform well and contribute to the company’s growth. Whether in the form of restricted stock, stock options, or performance-based awards, stock compensation is an effective way for companies to retain top talent and drive success.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.