When the company's stock rises, those who have been granted ESOs receive financial benefits from the good performance.
ESOs are also used to retain executives and key personnel by requiring a specified amount of time to pass before the option can be exercised, during which the company benefits from productive executives and employees.
To use as incentive plans, companies often grant "discounted," or "in-the-money," ESOs where the exercise price is less than the market price of the underlying stock on the grant date.
There are two types of ESOs: qualified stock options, which are also referred to as incentive stock options (ISOs) or statutory stock options, and nonqualified stock options.
In the aftermath, Apple spokesman Steve Dowling said: “Following an exhaustive independent investigation, the special committee found no misconduct by Steve Jobs or any other current management.
The board has expressed complete confidence in Steve and senior management.” But it did affect how the public viewed Jobs.
When these options then “vest” after a period of time, the executive can sell them at the new share price.
That can mean a nice bonus if the company increased in value.
The exercise price becomes the employee's basis in the stock for future capital gain or loss recognition.
The company issuing ISOs does not receive any tax deduction.