The importance of the correct structuring of the stock option plan within the overall setup of employee and manager compensation cannot be overrated. An increasing number of companies add various components at the time of planning the options in order to best realize the organization's objectives. It is important to note that almost any element of compensation reached by structuring options may also be constructed by a combination of a salary and bonuses. When comparing compensation plans, one must examine all of their components and the relationships between them. As a simple illustration, a cash bonus that cannot be redeemed for a fixed period of time, but is based on changes in the price of the share, is similar in nature to options. This type of compensation is indeed nicknamed as "phantom stock."

1. Approval of stock option plans— In most cases, options are distributed pursuant to a stock option plan (although they may also be distributed without any such plan). A general stock option plan is usually approved by the Board of Directors, and the managers are authorized to decide on an allotment of the options to the employees. In certain cases, the CEO retains the authority to set specific terms such as the vesting period of the options and the exercise price.

2. Exercise price — The options are usually allotted with a fixed exercise price which is identical or below the price of the share at the time of allotment of the employment contact signing. When there are various classes of shares, options may be awarded with an exercise price that is lower than the price of the shares in the last investment round, since employees are usually awarded options to buy shares that are inferior to investors' shares from the points of view of distribution at the time of the company's dissolution and their voting power. Therefore, it is logical that their price will be lower than the price of new shares allotted to investors. However, in various companies, particularly publicly traded ones, the exercise price of options is updated according to an appropriate stock index. The goal is to create an incentive to outperform similar companies in the field. The choice of shares used as a benchmark for the update is problematic, and it is usually made by the company's compensation committee, with the aid of outside advisors. In certain plans, the exercise price is updated with the rise in the price of the share, while others set a fixed exercise price. It is important to remember that options plans whose exercise price is constantly being updated could annoy the managers and increase the likelihood of their departure during long periods of underperformance, as the benchmark is rarely updated downward.

3. The number of options— It is usually customary to allot a fixed number of options for each period of service. Alternatively, options can be allotted concurrently with the signing of the initial contract, yet be vested only after predefined periods of service. In practice, if the price of the share rises, the employee profits not only from the rise in the price of the options that were allotted and have been vested, but also from the value of any options not yet vested.

4. Another customary plan is to award options annually at a certain pre-fixed value. For instance, every quarter over a period of four years, a manager will be issued options worth $100,000, with the value being determined every quarter separately. Thus, if the value of the company rises during that time, the number of allotted options will decrease. Such compensation naturally gives rise to the problem that as long as he or she is still receiving options, a manager who can influence the company's market value could have interests that are inconsistent with the best interests of the company. On the other hand, such plans allow the company to limit the cost of the managers they recruit. In addition, this method enables companies to periodically adjust the value of the options they award in accordance with what is customary in the market at that time.

5. Employee departure — An employee who leaves the company is usually entitled only to the options vested up to the time of his or her departure from the company, although he or she might be entitled to exercise the vested options for a few months after the departure. Stock option plans often provide for a forfeiture of rights in the case of a criminal offense, or, alternatively, for a right to additional options even after termination of the employment relationship.

6. Restrictions on the exercise of options— When a company is publicly traded, various regulations may apply to option holders with respect to the exercise of the options. Such regulations may result from legislation in the country in which the shares are listed or the company is registered, or from various managerial decisions designed to restrict the legal exposure of the company and its managers. For instance, many companies prohibit their employees from exercising options and selling shares at any time other than shortly after the publication of the company's statements, in order to prevent any allegations of insider trading by officers.