Why do companies award stock as opposed to cash?
Why do some companies award stock as opposed to cash?
Specifically, I'm speaking about unrestricted stock awards that can be sold immediately or held indefinitely. This is basically a cash award --- in the sense that it could be turned into a cash award by selling it immediately.
I understand the advantage of having employees invested in the company: it is motivation to work harder because your stock award will benefit from your hard work. But any sound financial advice that I have heard is to sell the stock immediately because you are already "invested" in the company by virtue of working there and to hold a significant amount of company stock in addition to your employment would be relatively high risk. Therefore a prudent employee would not hold on to the stock and would likely turn it into a cash award.
So, are there other reasons why a company would issue stock as opposed to cash?
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There are a few reasons, dependent on the location of the company.
The first, as you mentioned is that it means that the employee is invested in the companies success - in theory this should motivate the employee to work hard in order to increase the value of their holdings. Sometimes these have a vestment period which requires that they hold the stock for a certain amount of time before they are able to sell, and that they continue working at the company for a certain amount of time.
The second, is that unlike cash, providing stocks doesn't come out of the companies liquid cash. While it is still an expense and does devalue the shares of other shareholders, it doesn't effect the daily working capital which is important to maintain to ensure business continuity.
And the third, and this is for the employee, is tax reasons. In particular for substantial amounts. Of course this is dependent on jurisdiction but you can often achieve lower tax rates on receiving shares vs a cash equivalent sum, as you can draw out the money over time lowering your tax obligation each year, or other methods which aren't possible to look into now.
Hope this helps.
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