Stock grants are a form of compensation for employees in which an employer gives employees corporate stock in the company as part of an equity plan.
Employers issue stock as equity compensation to employees in exchange for non-cash consideration, such as the performance of services.
Employers award stock grants to employees with the hope that the company’s stock price will increase over time, translating to a shared desire to work hard and grow the business.
Stock grants also incentivize employees to keep working for a company to see through the vesting period or the length before the stocks become transferable.
Stock grants vs. stock options
Employers award stock grants to employees and provide them with the value of the corporate stock.
Stock options allow an employee to purchase shares of the company’s common stock at a fixed price. An employer provides the employee the opportunity to purchase various options of stock chosen by the company within a predetermined timeframe and price.
Unlike stock grants, an employee receiving stock options still has to pay for the stocks if they want them. They can also leave the company before the end of the vesting period and gain benefits offered by the stock shares.
What is an example of a stock grant?
Typically, a stock grant comes with a vesting period, and the employee only receives the stocks if they stay with the company through that time. An employee forfeits the stocks if they leave before their stocks vest.
For example, a company grants a new employee 100 shares of stock as part of their compensation package. The shares have a vesting period of five years, so the employee only acquires the stock if and once they work five consecutive years at the company.
What are the benefits of stock grants?
Both employers and employees gain many benefits from stock grants. These advantages include the following:
Companies offering stock grants can attract and retain top talent seeking additional global compensation and employee benefits. Employers show their commitment to building long-term relationships with their employees. Plus, employees offered stock grants are more motivated to stay with a company because they are invested in its ongoing success.
Improved work ethic
The value of the stock grant depends on the performance of the company. Employees gain from company stock price increases and are more invested in the company’s success. Employees receiving stock grants are more willing to put effort into their work to produce a better product or service.
Stock grants are a more reliable form of employee compensation than stock options. Stock grants are equitable property and have some intrinsic value, even if the stock market is volatile.
Because the employee has yet to purchase the stocks outright, stock grants remain at some value. Stock options, however, become less valuable if the stock market is volatile because the current market price of the stock may be lower than the set price.
Upfront cash savings
Stock options do not require a cash outlay upfront, and employers can defer some employee compensation. Because of the vesting period, the employer makes a future promise to reward their employees for the company's success.
Additionally, employees do not have to make any initial financial agreement. Employees who accept stock grants only agree to have the ability to purchase stock shares in the future.
Do stock grants count as income for employees?
Stock grants are considered income once vested. A portion of the shares are withheld to pay income taxes, and then the employee receives the remaining shares.
How are stock grants taxed?
Stocks are taxable income, and employees must pay income tax on their stock grants. Stock grants are subject to employment and federal tax, along with any other applicable local taxes.
Once the vesting period is complete, the employee owes income tax on the stock grants and must report the equivalent cash value of their stocks as income. The taxes are equal to the market value per share when the stocks vest.
In the United States, employers may claim a corporate tax deduction by reporting the value of their stock grants.
Offering stock grants to international employees
Stock grants are another tool to attract and incentivize quality talent worldwide. Companies gain a competitive advantage in the international hiring market by offering stock grants as part of a global equity program.
However, employment and tax laws vary significantly from country to country, and employers must practice due diligence to understand how to compliantly offer grant stock options to their foreign employees.
Employers seeking to offer stock grants to international employees must research the various tax obligations mandated in their target market and gain a firm grasp of how offering equity to talent can impact worker classification.
The simplest way to offer equity to your global team is by working with an expert benefits partner like Velocity Global. We partner with leading tax advisory firms to help offer compliant, market-specific equity awards around the world and handle everything from plan registration to payroll processing, reporting, and coordinating withholding rates.
Learn how our Global Equity Program makes it easy to grant comprehensive and compliant equity packages to your distributed workforce.
Disclaimer: This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. You should contact your attorney or tax advisor to obtain legal and/or tax advice with respect to your particular situation. Only your individual attorney or tax advisor can provide assurances that this information – and your interpretation of it – is applicable or appropriate to your specific situation. All liability with respect to actions taken or not taken based on this information is hereby expressly disclaimed. All content is provided "as is," and Velocity Global makes no representations or warranties concerning this information.