Why do companies hesitate to give stock options to employees? There are many issues here. Let’s examine three of them.
The first is that the value of the stock may plunge to a level where it will be disadvantageous for employees to exercise their option. The companies and employees are, however, required to report the associated expenses, creating an extra burden.
In the opinion of some employees, these options are more like casino tokens than real cash.
The staff prefers getting higher salaries rather than these options. The options create an added accounting burden and become a financial disadvantage.
These options also have their benefits. It is easier for the staff to understand stock options in comparison to additional salary, equities, etc.
One important aspect is that the value of the option is directly related to the success of the company. This, in turn, will encourage employees to put in more effort toward the company’s success.
The tax structure favors companies to give out option as opposed to shares.
One solution is the give what is known as a “knockout” option. These will be time bound and also lose its value if the share falls by a defined amount. E.g., an employee will receive an option allowing her to buy the stock at $150. If it is the “knockout” kind, it will expire if the value of the share drops below, say, $75.
Jeremy L. Goldstein is a partner at Jeremy L. Goldstein & Associates. This is a “boutique” law firm with a specialty in advising compensation committees, CEOs, management teams, and corporations regarding matters of compensation and corporate governance.
Jeremy Goldstein chairs the Mergers & Acquisition Subcommittee of the Executive Compensation Committee of the American Bar Association Business Section. He is a well-known speaker and writer on his specialty.
Jeremy Goldstein is a member of the Professional Advisory Board of his alma mater, NYU’s Journal of Law and Business. He is also active in several charities.
Connect with Jeremy Goldstein on LinkedIn.