6 top pros and cons of stock options

Giving staff stock options – and deciding whether to accept them if offered – may be less straightforward than they first appear. Here are some key points on when stock options can be beneficial, what to look out for, and how to make the most of them:

Pros

1. A potential workplace benefit

If you’re offered stock options, take a closer look. Some have the potential to deliver long-term value, though you often have to wait several years before a stock option ‘vests’ – meaning it can be sold or transferred to you.

2. Don’t overlook tax advantages

Not all stock option plans offer tax benefits, but some do. HMRC has a number of tax-efficient approved schemes you may be eligible for: SIP, SAYE, CSOP and EMI.

The first two – SIP (Share Incentive Plan) and SAYE (Save As You Earn) – are typically used by larger organisations and include income tax and National Insurance relief.

CSOP (Company Share Option Plan) and EMI (Enterprise Management Incentive) are more discretionary. They’re still treated more favourably by HMRC than non-approved share option schemes. CSOP allows up to £30,000 per employee, while the EMI scheme extends to £250,000 of market value. Be aware that strict eligibility criteria apply – for example, employees must work for the company for at least 75% of their working time.

3. Limited risk exposure

Some schemes, such as SAYE, allow you to buy your employer’s shares at a discount. If the share price rises, that’s positive; if it falls, you usually get your money back.

The main drawback is if the company’s share price does not increase, your money might have generated a higher return elsewhere.

4. Helpful for cash flow

This can be important for smaller businesses, particularly if you’re the employer. 'If you can’t afford to give pay rises to staff,' says Charles Cotton, performance and reward adviser at the Chartered Institute of Personnel and Development (CIPD), 'stock options are a good idea, though you’ll need to invest time in educating and communicating their benefits to staff.'

5. Encourage employee engagement

From the boardroom to junior roles, stock options are often used as an incentive to align staff performance with company success. The theory is that if employees are motivated, productivity improves.

However, this isn’t always the case – research shows that such effects can be temporary.

6. No ongoing charges

Stock options generally don’t include management or service fees. While small monthly charges on conventional investment plans can erode returns over time, stock options typically avoid these ongoing costs, helping to preserve potential value.

Cons

1. Important small print to review

There are several checks to make before committing. 'Is the company listed or unlisted?' asks Ruth Bender, professor of corporate financial strategy at Cranfield School of Management. 'If it’s unlisted, there’s no market share price. How will the stock option price be set? Ask questions.'

If the company is unlisted and the shares vest, when and how can you sell them? Who determines the price, and how is it calculated? If the offer appears overly favourable, approach it with caution.

2. Share price exposure

In strong market conditions, a rising share price can be beneficial for staff – but markets fluctuate. 'From the employer’s perspective, if the share price falls, it can seriously damage staff morale,' notes Charles Cotton, performance and reward adviser at the Chartered Institute of Personnel and Development (CIPD).

For example: a declining share price can increase staff turnover and reduce confidence among investors, adding to market volatility. Some schemes, however, include features designed to limit these risks. Past performance is not a reliable indicator or future results.

3. Timing matters

It can take several years to benefit from a stock option. 'If you leave before, say, three years have passed, do you fall into the ‘good leaver’ or ‘bad leaver’ category?' asks Ruth Bender.

You might leave due to ill health, redundancy or a change in career direction. It’s worth understanding the company’s policy in advance to avoid forfeiting your rights.

4. Consider potential tax implications

Careful tax planning may be needed to ensure you’re in the most appropriate tax position when selling. Some stock option plans also include a ‘use-it-or-lose-it’ clause, meaning you may lose your rights if not exercised within a set timeframe.

5. Concentration risk

Diversification remains important. Investing heavily in your employer’s shares places both your income and savings at risk from the same source. If the business underperforms, the impact can be compounded. Balancing your investments across different assets can help manage this risk.

6. Proceed with care

Long-term stock options depend on the company’s future performance. In the event of a takeover or merger, the value of those options may be reduced. Future share price expectations should be viewed cautiously, as market conditions and company structures can change over time.

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