Stock Option is a system that gives employees the right to purchase company shares at a predetermined price under certain conditions. It serves as a tool to retain key talent by offering long-term compensation beyond regular salaries, thus providing an incentive for performance.
Initially, it was introduced by venture companies with limited financial resources to secure talent. Its application has now expanded to large corporations, listed companies, and even some public institutions. The system now increasingly covers not only executives but also regular employees.
For example, if an employee is granted a stock option at 10,000 KRW and the stock price later rises to 30,000 KRW, exercising the option would yield a profit of 20,000 KRW per share. The fixed price is set at the time of option granting, and the actual profit depends on the stock price at the time of exercise.
Stock options cannot be exercised immediately. There is a “vesting” period, an obligatory service period, generally requiring 2-3 years of service before rights can be exercised, thus encouraging long-term retention of key personnel.
Additionally, stock options do not involve receiving shares for free; shares must be purchased at a predetermined price, and the funds need to be provided by the employee. Some companies offer to compensate the profit margin in cash or allow the selling of a portion of the shares to cover the purchase costs.
Relevant regulations are stipulated in corporate law and special measures for the promotion of venture businesses. Venture companies may grant stock options for up to 50% of the total shares, while general unlisted companies may do so up to 20%. Listed companies face more stringent restrictions under the rules of the Financial Services Commission and the stock exchange. The granting of stock options requires the approval of the board and the general shareholders’ meeting, and the quantity and conditions must be specified clearly.
Taxes must also be considered. Generally, they are tax-free at the time of exercise, but capital gains tax applies to profits made upon selling the shares. However, some exceptions apply to venture companies up to a certain limit.
Stock options also align the interests of the company and employees. Since profit is only achievable if the share price increases, employees have a vested interest in the company’s performance. Companies benefit from retaining talent, and employees are motivated as company growth directly correlates to their personal gain.
However, not every scenario results in compensation. If the stock price does not rise or falls, the rights may become meaningless. As the outcome varies depending on the design of the system, transparency in the criteria for granting and managing stock options is crucial.
Stock options represent a promise for the future rather than immediate reward, and careful design and rational administration are essential for their functioning as true incentives.
