Learn what compensatory stock options are, how they align incentives, and why grant structure affects accounting and dilution.
Compensatory stock options are stock options granted as part of employee or executive compensation. They are designed to pay partly in potential equity upside rather than only in cash salary or bonus.
The employer grants the option to buy shares at a stated exercise price, usually subject to vesting conditions and expiration. If the stock price later rises above the exercise price, the option becomes economically valuable to the employee. From the company’s perspective, the grant affects compensation accounting, potential dilution, and incentive design.
This matters because compensatory options are intended to align employee incentives with shareholder outcomes, but they also create tradeoffs around dilution, risk-taking, retention, and expense recognition. They sit at the center of many executive-pay debates.