Compensatory stock option definition

What is a 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.

Accounting for Compensatory Stock Options

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. For example, if an employer has offered compensatory stock options to an employee that span a period of three years of related service, and the total compensation related to this arrangement is $36,000, then the employer would record the following journal entry in each of the 36 months:

By the end of the service period, the employer will have recognized a total of $36,000 in compensation expense.

Related AccountingTools Courses

Human Resources Guidebook

Payroll Management

Related Article

Incentive Wage Plan