Unearth wealth in employee stock options

From corporate giants such as Microsoft, Merck and IBM to smaller publicly owned companies, stock options have become an increasingly popular way to compensate employees. Once considered the payroll "currency of choice" for high-tech companies that were short on capital but long on potential, stock options have hit the mainstream.

As of 1998, about 3,000 companies nationwide granted stock options to more than 7 million employees, according to the National Center for Employee Ownership, a nonprofit research organization based in Oakland, Calif. The average value of the most recent stock option grants to nonmanagement employees was between $37,000 and $41,000 for professional and technical employees, and $12,500 for administrative employees.

Average value in this context is defined as the number of options granted times the share value on the date of the grant.

A stock option gives employees the right to buy their employer's shares at a fixed price over a set number of years, usually five or 10 years. During that time, for example, employees might be given the right to buy up to 500 shares of stock at $10 a share, regardless of the stock's current publicly traded value.

To employees fortunate enough to receive them, stock options can be a significant reward especially if the stock has appreciated above the exercise price. Yet many people have no idea how to unlock this potential wealth.

Employees may receive a statement from their employer stating they have an option to buy X number of shares by X date, but they don't know how to get their money out of the process or may not have enough ready funds to exercise their options.

An easy way for employees to exercise their stock options and garner the proceeds is through what is known as a cashless exercise. With a cashless exercise of stock options, there is no out-of-pocket cost for the employees. The entire transaction can be handled so employees can realize their profit as soon as possible.

To conduct a cashless exercise of stock options, employees will need the following documentation from their employer stating:

The number of options eligible for exercise.

The expiration date(s) for the options.

The price the employee may pay for the options the grant price.

Once employees have completed the necessary paperwork, the stock is liquidated to get the proceeds necessary for exercising the stock option. The employees get the sale proceeds, less the purchase price, and tax withholding, brokerage commission or other fees.

It's important to note that any profits realized from the sale of exercised stock options may be taxable, so it's wise to consult with a tax adviser before exercising options. In addition, some companies may restrict the sale of exercised options, so employees should check with their employer before proceeding.

A licensed brokerage representative can help you initiate a cashless exercise of stock options. For many people, this is one of the biggest monetary transactions they will make in their lifetime. It really pays to get help.

(Shareen Beal, senior vice president, Commerce Brokerage Services Inc., is a licensed Series 7 and 63 general securities representative registered with the OCC, SEC & NASD.)