It is important to realize that issuances of securities to employees (most frequently options or restricted stock), like securities issuances to any other person, are subject to federal and state securities regulations. Consequently, neither an issuer nor an employee may sell unregistered securities without either registering the security or qualifying under an exemption. Having and, if appropriate, registering a stock plan will generally satisfy an exemption for certain issuances of securities to service providers of the company pursuant to the stock plan. By issuing securities to its service providers pursuant to the stock plan, a company does not have to concern itself over whether each such individual issuance is properly exempted from securities laws.
The most common forms of incentives for the employees of young, growing companies are awards of restricted stock and stock options that are granted pursuant to a company stock plan. These types of equity awards provide employees with the opportunity to acquire stock of the company on favorable terms; in return, the employees are generally required to remain employed by the company for a certain period before obtaining unrestricted ownership of the stock or the right to exercise the options. The purpose of granting stock or options to acquire stock in the company at a designated price is to attract, retain and motivate employees by providing for or increasing the proprietary interest of such employees in the company. Other reasons for the popularity of equity awards include the ability of the employee to receive compensation with favorable tax treatment and the fact that the employee is given the opportunity to receive compensation without a cash outlay by the company (but the possibility of still receiving a tax deduction).
Details about stock options can be found here and details about restricted stock can be found here.