Which of the following describes stock options?

The description that stock options refer to rights to buy shares at a specified price based on performance accurately captures the essence of what stock options are. When employees are granted stock options, they receive the opportunity to purchase company stock at a predetermined price, known as the strike price, within a specific timeframe. This price is typically set at the market value of the stock at the time the options are granted.

The performance factor plays a crucial role in the value of these options. As the company performs well and its stock price increases, the options become more valuable because employees can buy shares at the lower strike price and potentially sell them at the current market price. This structure aligns employees' interests with those of the company and its shareholders, incentivizing them to work towards enhancing the company’s performance, which can lead to increased stock prices.

In contrast, the other options do not accurately represent stock options. Guaranteed share purchases do not exist in stock options, as their value is dependent on performance. Fixed annual bonuses that depend on share price refer to a completely different compensation structure, while profit distribution as stock refers to dividends, which are unrelated to stock options. Each of these misconceptions highlights how stock options are more about potential future gain tied to performance rather than guaranteed returns.