If the price of the company's stock rises above the exercise price, the holder realizes gains equal to the difference between the exercise price and the current fair market value. Because the company loses a tax deduction at the time of exercise with ISOs, these awards are more costly and many companies have relied on NQSOs. However, with the meaningful reductions in capital gains rates included in the new federal budget, ISOs should quickly return to full popularity. There are numerous variations in the design structure of option programs. Option exercise price is less than the fair market value at grant.
Option price is higher than fair market value at grant.
Options vest only if specific goals are obtained. Options vest earlier if certain performance goals are met. Options are well understood and accepted by executives. Options have no real downside risk, they do not necessarily assure that participants will be long-time owners of company stock, and they result in dilution of shareholder value. Stock grants are also commonly used in addition to or, in some cases, instead of stock options.