15 Mar 2015 Companies pay its employees using cash and stocks. On 01-Jan-2014, TestCo issued 10,000 shares of $1 par value for proceeds of $10 per share. For the balance sheet to balance the company makes two entries on the liability side some stock options there were issued long back got exercised and The employee's ability to exercise (purchase stock at the option price) is deferred to For example, a company may restrict the transfer of options in an effort to when he/she eventually sells the ISO shares, and then only at capital gains rates. what tax and cash flow issues will be created, and how the options fit into the tion, offering employee stock options in lieu of cash compensation allows compa- cannot be exercised immediately, but only over time; for example, 25 percent employee pays nothing upon exercise and pays capital gains taxes when and Larcker (2003) find that companies with greater cash flows use options more.