Saturday, January 31, 2015 3:49:45 PM
"An employee stock option (ESO) is commonly viewed as a complex call option on the common stock of a company, granted by the company to an employee as part of the employee's remuneration package.[1] Regulators and economists have since specified that "employee stock options" is a label that refers to compensation contracts between an employer and an employee that carries some characteristics of financial options but are not in and of themselves options (that is they are "compensation contracts").
As described in the AICPA's Financial Reporting Alert on this topic, for the employer who uses ESO contracts as compensation, the contracts amount to a "short" position in the employer's equity, unless the contract is tied to some other attribute of the employer's balance sheet. To the extent the employer's position can be modeled as a type of option, it is most often modeled as a "short position in a call." From the employee's point of view, the compensation contract provides a conditional right to buy the equity of the employer and when modeled as an option, the employee's perspective is that of a "long position in a call option."
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