A stock option is the term used when a company grants an employee the option to purchase stock of the employer, or the parent or subsidiary corporation, at a specified price at some time in the future. Stock options are an accepted industry standard for compensating employees because it reflects the ability of employees to influence the future growth and value of the company.
The amount of options granted is generally based upon a percentage of pay, a merit formula, or an equal distribution. Most stock option plans have a vesting period where the options become available for exercise, and an expiration date. In most cases, the optionee will only exercise their stock options when the current market value is higher than the exercise price.