until certain conditions are met (usually a certain length of time passing (vesting period) or a certain goal achieved, such as reaching financial targets) They may be compared to stock options with a strike price of $0. restricted stock units (RSUs) – Rights to own the employer’s stock, unlike restricted stock they are tracked as bookkeeping entries and lack voting rights. They may be paid in stock or cash. The National Center of Employee Ownership describes them as being "like phantom stock settled in shares instead of cash" stock appreciation rights – These provide the right to the monetary equivalent of the increase in the value of a specified number of shares over a specified period of time. As with phantom stock, it is normally paid out in cash, but may be paid in shares. phantom stock – A promise to pay a bonus in the form of the equivalent of either the value of company shares or the increase in that value over a period of time. employee stock purchase plan (ESPP) Taxation of employee stock options in the United States Because most employee stock options are non-transferable and are not immediately exercisable though they can be readily hedged to reduce risk, the IRS considers that their "fair market value" cannot be "readily determined", and therefore "no taxable event" occurs when an employee receives an option grant. Depending on the type of option granted, the employee may or may not be taxed upon exercise. Non-qualified stock options (those most often granted to employees) are taxed upon exercise. Incentive stock options (ISO) are not, assuming that the employee complies with certain additional tax code requirements. Most importantly, shares acquired upon exercise of ISOs must be held for at least one year after the date of exercise if the favorable capital gains tax are to be achieved. However, taxes can be delayed or reduced by avoiding premature exercises and holding them until near expiration day and hedging along the way. The taxes applied when hedging are friendly to the employee/optionee. Generally accepted accounting principles According to US generally accepted accounting principles in effect before June 2005, stock options granted to employees did not need to be recognized as an expense on the income statement when granted, although the cost was disclosed in the notes to the financial statements. This allows a potentially large form of employee compensation to not show up