Do employees with stock options make more money than recipients of restricted stock?

It all depends on the performance of their employer's share price. "If the stock price goes through the roof, the option holder will win every time," observes Matt Ward, CEO of WestWard Pay Strategies, a compensation-consulting firm in San Francisco.

Let's say a company grants an employee 10,000 stock options at an exercise price of $30 a share. A colleague receives 3,500 restricted shares. With the company's stock closing that day at $30, its compensation consultant initially assigns the same value to both grants. At the end of five years, the option holder may exercise, or exchange, all his options for shares and his colleague can sell his previously restricted shares.

If the share price doubles to $60 by then, the employee holding options can reap a $300,000 pretax gain. The employee with restricted stock will make $210,000 before taxes from the sale of his shares, according to Mr. Ward. The crossover point where the option holder starts making more money than the restricted-share recipient probably occurs between $40 and $50 a share, Mr. Ward figures.

If the share price plummets to $15 at the end of five years, the options will be worthless. The holder of restricted stock will earn $52,500 before taxes from shedding his stake, Mr. Ward says.

What happens if the company's shares still trade at $30 after five years? The holder of the options wouldn't make any money from exercising his options. But his colleague with restricted stock would reap $105,000 before taxes from selling the shares, Mr. Ward says.

On the other hand, options generally enjoy a 10-year lifetime, so the holder of options could hold out for a more bullish stock market.

Tax burdens also differ. An employee must pay income taxes after exercising options and again after selling acquired shares if they are held for less than a year. That employee is subject to lower capital-gains taxes if he owns the stock for longer than that -- and the price keeps rising.

But Uncle Sam demands income taxes from the owner of restricted stock as soon as the restrictions lapse, even if he doesn't sell. He, too, will owe additional taxes when he sells those shares, as long as the stock price continues to climb. He also will be taxed at the capital-gains rate for holding the equity for more than a year.