incentive stock option
Noun: 1. A type of stock option granted to corporate executives and employees, which qualifies for special tax treatment under U.S. law, provided the company meets specific, pre-determined financial performance goals. Unlike non-qualified stock options, ISOs are designed to incentivize long-term growth and retention.
The term "incentive stock option" is used specifically in the context of corporate compensation, finance, and tax law. It refers to a conditional benefit offered as a motivational tool. - It is often abbreviated as ISO. - It is typically granted with a vesting schedule, meaning the employee earns the right to exercise the options over time or upon achieving milestones. - The key condition is that the company must achieve certain financial targets (e.g., stock price, revenue, profit goals) for the options to be granted or become valuable.
- The board approved a new plan offering incentive stock options to its senior management team, tied to a five-year revenue growth target.
- One major advantage of an incentive stock option is the potential for capital gains tax treatment upon the eventual sale of the stock, rather than ordinary income tax at the time of exercise.
- Her compensation package included a base salary, an annual bonus, and incentive stock options that would vest if the company's share price increased by 20%.
- Qualifying Disposition: A sale of stock acquired through an ISO that meets specific holding period requirements (at least two years from the grant date and one year from the exercise date), resulting in more favorable long-term capital gains tax rates.
- Disqualifying Disposition: A sale of ISO stock that does not meet the required holding periods, causing the gain to be taxed as ordinary income.
- ISO: The common abbreviation for "incentive stock option."
- Non-qualified Stock Option (NSO): A more common type of stock option that does not qualify for the special tax treatment of an ISO. Any gain upon exercise is taxed as ordinary income.
- Employee Stock Option (ESO): A broader term encompassing both ISOs and NSOs granted to employees.
- Vesting: The process by which an employee earns the right to exercise stock options over time.
- Qualified stock option (This is a less common but technically accurate synonym, as ISOs are defined in the U.S. Internal Revenue Code as "qualified" options.)
- Exercise an option: To use the right granted by the option to purchase the underlying stock at the predetermined "strike" price.
- Grant date: The date on which the incentive stock option is awarded to the employee.
- Strike price: The fixed price at which the option holder can buy the stock.
- an option granted to corporate executives if the company achieves certain financial goals