Stock Compensation

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DEFINITION of 'Stock Compensation'

A way corporations use stock options to reward employees. Stock compensation can be very profitable for the employee if the stock prices increases. New companies tend to be riskier than long standing corporations which have a record of proven performance, so they often use stock options to attract long-term employees.

BREAKING DOWN 'Stock Compensation'

This is a common method used by corporations to compensate executives. The theory is that executives will work harder since they want their own stock to rise in value and, therefore, have the best interests of shareholders in mind.
Employees with stock options need to know whether their stock is vested. This means the stock will retain its full value even if they are no longer employed with that company. Tax consequences depend on the fair market value of the stock. If the stock is subject to tax withholding, the tax must be paid in cash even if the employee was compensated in the form of stock. Also referred to as equity compensation.

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