What Is an Option Schedule?

The term option schedule refers to a list of options granted by a company to its employees. Employers commonly offer employees options in the form of stocks as a type of compensation. This is especially common for high-level employees like officers and directors of public companies. The schedule for these options normally contains important information, such as the exercise price, size, and vesting schedule. The Securities and Exchange Commission (SEC) requires that option schedules of public companies be disclosed for public scrutiny, typically through 10-Q and 10-K filings.

Key Takeaways

  • An option schedule is a list of options granted to the employees of a company.
  • These schedules contain important information, such as the exercise price, size of the option, and vesting schedule.
  • Public companies are required to submit their options schedules as part of their regular filings with the Securities and Exchange Commission.
  • Options schedules can be quite complex, especially when the company relies heavily on stock-based compensation.
  • Investors and analysts can use databases to scrutinize option schedules, which are generally found in their 10-Q and 10-K filings.

Understanding Option Schedules

As mentioned above, an option schedule represents a series of options a company provides to its employees. Options are normally granted as a form of compensation in addition to an employee's salary or wages. This type of compensation is primarily paid to specific workers, especially those who are higher up, such as management, executives, and directors. They are commonly used as a way to attract and retain the best talent possible.

A schedule provides some key information about the options offered. This includes the:

  • Exercise price: the price at which the stock was initially offered
  • Size of the option: the total number of shares offered
  • Vesting schedule: the point at which an employee has full rights to the options

This information can be found on a company's 10-Q and 10-K reports, which are filed annually as per SEC guidelines.

Investors can review an option schedule to get valuable insight into a company’s current and future liabilities. It can also shed light on the risk of future stock dilution for an investor. Companies can use schedules to maintain proper accounting records. They are particularly important for those that rely heavily on stock options as a form of employee compensation. Stock options theoretically help reduce the principal-agent problem by aligning executive compensation with company performance.

After all, if an executive is given options that will only become valuable if the share price of the company increases, that executive will have an added incentive to focus on improving the company’s valuation. On the other hand, some argue that stock-based compensation can encourage executives to chase short-term results in favor of long-term improvements.

Special Considerations

Investors are paying more attention than ever to the use of stock-based compensation, especially in light of options backdating scandals and other accounting schemes. In response to these concerns, many changes have been made—namely stricter reporting requirements—as to how employee stock options may be granted, reported, and presented to investors.

For instance, electronic record-keeping and the availability of online databases have eased the information gathering burden for interested parties. This is especially true of the SEC’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. It was established in 1984 to make information available and easily accessible to investors and corporations.

Accurately estimating the likely cost and timing of when options are exercised remains a complex task. For this reason, corporate governance best practices generally discourage companies from creating complicated and opaque option vesting schedules.

EDGAR is one of the most widely used databases for financial information in the United States.

Real-World Example of an Option Schedule

Tesla (TSLA) provided details of its option schedule in Note 15 for the 2018 fiscal year in its 10-K filing on Feb. 19, 2019. From it, we can see that the company had made available up to roughly 9.1 million shares for use in stock-based compensation for their executives and employees, relative to the 173 million shares which were outstanding at that time.