On the one hand, it wishes to attract a top shelf management team, often from well established multi national companies, professional service firms and academia. On the other hand, limited resources prevent paying top shelf salaries. The most common compensation alternative used to attract executives is the granting of stock options. Stock options allow executives to enjoy an equity stake, tied directly to the performance of the company. The stock underlying the options should increase in value if the company performs well.
Stock options can be valuable if a private company is later acquired.
Finally, stock options are the primary exit strategy if and when a firm goes public. The company should consider both the financial statement implications and the tax consequences of options or grants. Contractually provided annual bonuses are atypical because of the uncertain cash flows of developing enterprises. Normally, there is no steady income stream to measure, and costs can be expected to increase, especially in research and development. There are, however, alternatives.