The manner in which most Section 423 plans are designed, employees purchase stock through payroll withholding every six to twelve months. Since, by definition, there is no trading market for the stock of private companies, employees with options can better avoid the risk of buying stock which they cannot sell at that time. Many employers also prefer stock options because of greater flexibility in awarding stock compensation based on an employee's performance. Section 423 plans require that all rights to purchase stock have the same terms and conditions. That means employers have little to no ability under Section 423 plans to adjust the size of stock awards based on performance.
Stock options have no similar limitations.
Neither private companies nor public companies use Section 423 plans as their primary stock compensation plan, and this is the chief reason. In short, FASB believes that if a company can sell stock to employees for a bargain price, the bargain amount is presumptively compensatory. FASB also believes that compensatory stock awards should be reflected in a company's financial statements as a compensation expense, just like a cash bonus. Doing anything else is inaccurate and misleading accounting. However, as Section 423 plan designs have gotten more exotic, bargains to employees in many cases have exceeded amounts which could be justified as the sharing of cost savings.