Compensatory stock option

A compensatory stock option is an option given to an employee, giving the person the ability to buy a certain number of company shares at a predetermined price, and within a predetermined date range. The option is intended to be part of an employee’s compensation package. By issuing stock options to an employee, an employer gives the person an incentive to improve the entity’s performance, thereby driving up its stock price. The employer charges the amount of compensation inherent in this arrangement to expense over the periods during which the recipient is providing related services to the employer.