What is Stock Compensation?

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  • Written By: Luke Arthur
  • Edited By: C. Wilborn
  • Last Modified Date: 23 August 2019
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Stock compensation is a benefit provided by many companies to their employees instead of cash payments. In such cases, the company will give stock or stock options to upper level executives in order to provide extra incentive for the executive to work hard and stay with the company. Some companies also provide cash bonuses with the stock compensation in order to help the employees pay for the taxes on the stock that was received.

Many companies provide stock to their employees as part of their compensation package. When an employee owns stock in the company, it is usually to his or her advantage for the company to do well. Some individuals prefer stock compensation because cash will only provide the individual with a fixed value, but stock could be worth a lot more in the future if the company prospers.

Companies generally provide stock compensation to executives in the company rather than lower level employees. In addition to their base pay, these upper level executives could receive bonus pay, stock options, and other incentives. The idea behind giving these employees extra stock is that it will give them extra motivation to work harder for the company. The hope is that the executives will manage the company better and then the price of the stock will increase. At that point, the employee will be rewarded for his or her hard work with capital appreciation in the stock price.


One issue that individuals who get stock compensation should be aware of is the potential tax consequences. The stock that is received by the individual will have to be counted as income when taxes are filed. In most cases, the individual will be required to come up with cash to pay the taxes on this income.

In order to address the tax issue, many companies will provide employees with additional cash compensation. The company can provide an amount of cash that is close to the amount that the employee will have to pay in taxes. Then the employee can simply use that money to pay the taxes, and he or she will not have to sell any of the stock to pay the taxes on it.

Individuals who receive this type of payment should be aware of the additional risks that are associated with it. When compensation is received, the employee has to decide when to sell the stock. If the value of the stock declines, he or she could potentially lose a large portion of the compensation. This requires the individual to choose the proper time to sell in order to maximize the profit.


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