Why Employers Prefer Non Qualified Stock Options As An Incentive

Non qualified stock options are options offered by employers which do not have the tax advantages inherent in incentive options. With incentive options, which are only available to employees of the company which issues them, taxes on any gains are payable at a lower long term capital gains rate, rather than the standard ordinary income rate normally charged. This makes the investment even more attractive to employees who can add a tax savings to their potential gains. Of course, this only matters if the share price does indeed increase beyond the option price.

A qualified stock option may be the most attractive to the employee buying the option, but it is not necessarily more attractive to the employer. There are actually tax incentives for the employer in issuing non qualified stock options, as they are allowed a tax deduction equal to the difference between the exercise price and the market value. There is obviously a trade off between the need to save tax, and the need to be able to offer an attractive deal to potential employees.

When offering stock options non qualified deals have the advantage of a slight tax savings, but you have to consider that the employees you are trying to attract will look more favorably on the deals with the tax incentive in their favor. In the end, there is no difference in reality, as the employer can obviously offer a better price when the tax incentive is in their favor. The only difference is one of perception, and how important that is can only be measured by the effects in the recruitment marketplace.

It has long been said that tax incentives play too big a part in the investment choices of many people. It is always instinct to want to save as much tax as possible, but it is important to remember that no tax will ever become payable unless there is a profitable transaction in the first place. It is far more important to concentrate on the potential gains any investment can make than to worry about how much tax you might have to pay on those gains.

Stock options of any kind represent a unique investment opportunity which serves both sides. The company benefits both from the lack of risk involved, and from the fact that they do not need to raise extra money at the start of their operation. Employees can benefit handsomely if they can be part of a team which can raise the share price to a higher level, especially if they then do not fall into the trap of taking quick gains when there is further growth left to come. This applied even more in the case of non qualified stock options.






 

 

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