Which type of stock option specifies an exercise price that is above the current market price due to expected employee performance?

Incentive stock options are designed to encourage employees to perform at a high level by linking the exercise price of the option to expected future performance. When the exercise price is set above the current market price, it creates a performance-driven incentive; employees must improve company performance and push the stock price higher to make the options valuable.

This structure aligns the interests of the employees with those of the shareholders, motivating employees to work towards increasing the stock's value. This enhances the company's performance and, in return, potentially increases the profitability for the employees when they exercise their options at a higher price.

Non-qualified stock options can be issued with more flexibility regarding exercise prices, but they do not specifically incentivize based on expected performance. Restricted stock options typically involve shares that are granted but cannot be sold until certain conditions are met, which differs from the option exercise structure. Stock appreciation rights are a form of compensation tied directly to the appreciation of the stock price, but they don't involve setting an exercise price; instead, they allow employees to benefit from stock price increases without having to purchase the actual stock.