Stock Options Query

Posted on May 5, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Question:

My hospital wants to give me some stock options. I am a senior nurse manager. What are hospital stock options anyway, and why are they so popular? Should I ask for cash instead?

IOW: Show me the money! Please advise if you can.

Thank you.

PS: Great blog!

Samuel [Sam] M. Jefferson; RN

Baltimore, MD

Filed under: "Advisors Only", "Ask-an-Advisor", "Doctors Only", Financial Planning, Investing |

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One Response

  1. Executive-Post, on May 5, 2008 at 12:10 AM said:

    Sam’s Answer

    Stock options are not unusual; so don’t be afraid of them. But, hospital stock options require a special contractual arrangement that gives employees like you, the right for a designated period of time, to purchase stock in their public hospital or traded health system at a set price.

    For example, a hospital employer grants to an employee the right, at any time over the next 10 years, to purchase stock of employer at a price of $10 a share. Thus, if the stock value increases to $20 a share and the employee exercises the option he will pay $10 for an asset worth $20. On the other hand, if the stock value decreases to $5 the employee simply does not exercise the option and the option lapses. This arrangement allows the employee in effect to enjoy the risk free benefits of an increase in value without any economic cost.

    Stock options are so popular because they offer advantages to both employees and employers. Employees can share in the growth of a company’s equity just like a shareholder, but without any immediate cash outlay. They can acquire stock at less than fair market value, and, under certain conditions, obtain the economic benefit of the excess of the stock’s fair market value over the option price without an immediate tax gain (which will be reported only on the subsequent sale of the stock).

    Options have simultaneous advantages to employers:

    First, they can provide incentives to employees without a cash outlay. In fact, the employer receives cash when the employee exercises the option.

    Also, if properly structured under current accounting rules, there is no change to the employer’s earnings for financial reporting purposes, either on the grant or the exercise of the option.

    Trust this is helpful to you; and thanks for your support of this blog.
    Good luck!
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    Financial Planning: http://www.jbpub.com/catalog/0763745790
    Risk Management: http://www.jbpub.com/catalog/9780763733421
    Healthcare Organizations: http://www.HealthcareFinancials.com
    Administrative Terms: http://www.HealthDictionarySeries.com

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