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The following is for information purposes and not meant to be legal or financial advice.

Fewer companies are granting stock options because of scandal concerns relating to backdating, and trades based on misuse of insider news; and because option grants may be counted as expenses in their financial results.

What is the difference between stock options and restricted shares? Restricted shares cannot be sold unless the employee remains at the company for a stated period. Unlike stock options, with an exercise price, restricted shares cost the recipient little or nothing and generally is not tied to future performance. If the company's stock price tanks before the shares are fully vested, the individual profits from selling the shares because they did not cost him/her much in the first instance.

However, the individual may lose in terms of tax consequences. Stock options are not usually taxed until the individual exercises them, which gives the person control over when he/she pays the taxes. Restricted shares are taxed in the year they vest, whether the individual sells them or not.

The Internal Revenue Service (IRS) considers the shares compensation. The individual pays taxes at his/her ordinary income rate, not the lower capital gains rate. Taxes are usually based on the market value of the shares when they vest, not the value at the time of the grant.

An alternative to paying taxes when the individual’s stock vests is a Section 83(b) election. The individual pays taxes within 30 days of receiving the grant. The individual pays income tax based on the value of the stock at the time of the grant, and future gains will be taxed at the lower capital gains rate. If the stock rises significantly between the time of the grant and vesting, a Section 83(b) election will result in a lower tax bill.

Under a Section 83(b) election, if the individual leaves the job before the shares vest, he/she will end up paying taxes on income he/she never received. If the shares decline in value, the IRS will not refund any overpayment.