Definition

Noun: 1. A type of stock option granted to senior corporate executives as a performance-based reward: An "incentive option" is a contractual right given to key employees (typically executives) to purchase a specific number of the company's shares at a predetermined price. This right is contingent upon the company meeting pre-defined, measurable financial targets or goals, such as earnings per share or stock price thresholds. Its primary purpose is to align the executives' financial interests with the company's performance and shareholder value.

Usage Examples

• Noun:
  • The board approved a new package of incentive options for the CEO, linked to a 15% increase in annual revenue.
  • Exercising her incentive options became very profitable after the company's successful product launch exceeded all financial goals.
  • The compensation committee is designing the incentive option plan to motivate the management team toward long-term growth.

Advanced Usage

• "Qualified" vs. "Non-qualified": In some contexts, particularly in U.S. tax law, an "incentive stock option" (ISO) is a specific, qualified type with particular tax advantages, as opposed to a non-qualified stock option (NSO). The term "incentive option" is often used synonymously with ISO in this technical sense.
  • He consulted a tax advisor to understand the implications of exercising his incentive options versus his non-qualified options.

Variants and Related Words

• Incentive Stock Option (ISO): The full, formal term often used in legal and financial documents, especially in the United States.
• Performance Share Unit (PSU): A related compensation instrument where the award of company stock itself (not just the option to buy it) is contingent on meeting performance goals.
• Stock Option: The broader category of financial instruments that includes incentive options, non-qualified options, and employee stock purchase plans (ESPPs).

Synonyms

• Performance-based option: Emphasizes the conditional nature on achieving goals.
• Executive stock option: Highlights the typical recipients of such grants.

Related Phrases

• To grant/issue incentive options: The action of the company's board or compensation committee awarding these options.
  • The company will grant incentive options to its new CFO as part of the hiring package.
• To vest an incentive option: To earn the right to exercise the option, which often happens over time or upon meeting a goal.
  • Her incentive options will vest only if the stock price reaches $50 per share.
• To exercise an incentive option: To use the right to purchase the shares at the agreed-upon price.
  • He decided to exercise his incentive options after the vesting period was complete.

Noun

1. an option granted to corporate executives if the company achieves certain financial goals