by Liese L. Hutchison
The compensation craze in the 90s shows no signs of easing up in the next millennium. Employees used to ponder personal days, vacation time and 401(k) contributions before accepting a job, now they expect stock options to be a part of the benefits package. With high-tech companies leading the way in offering stock options to most, if not all employees, and with the country experiencing record-low unemployment, more and more companies are offering stock options. But do options affect performance and bottom line, and do companies run the risk of diluting shares?
“Offering stock options is a motivating tool emotionally,” says Jerry McAdams, national practice leader, Watson Wyatt Worldwide. “It says ‘I have a piece of the rock.’ Does it actually affect performance? When you have broad stock employee ownership, financial performance tends to be a bit better. I wouldn’t say, however, there is a causality. There could be 50 other reasons.” McAdams notes that he is not aware of any data or study that shows a correlation between improved performance and stock ownership, even the business trend is to offer options to everyone, not just top brass.
What is a stock option? An option gives an employee the right to buy a certain number of shares in the company at a fixed price for a certain number of years. The price at which the option is offered is the grant price and is typically the market price at the time the options are granted. If the stock goes up, the employee can cash it and make money, paying taxes on the capital gains. If the stock goes down, the company may have to reprice the option.
McAdams notes that stocks fluctuate and most employees aren’t stock savvy. He retells one story in which a company granted stock to all employees, the company’s stock went down and the employees were furious even though the stock was given to them in a grant instead of a purchase agreement. “Most people don’t know much about stocks and the stock market,” he notes.
Another downside of offering stock options is dilution. The industry standard used to be that companies shouldn’t offer more than 10 percent of their stock to employees. But that norm disappeared in this hot labor market. BankAmerica, Dell Computer, Microsoft, Merrill Lynch and Delta Air Lines are a few publicly held companies that allocate more than 25 percent of their stock to employees. “Dilution costs the company money,” McAdams notes. The general business consensus is, however, dilution may be worth the risk because as shareholders, employees are engaged more in the company.
Privately held companies also offer stock options. Up to 10 percent of Maritz’ 6,000 worldwide employees receive stock options. According to Terry L. Goring, senior vice president, human resources, the company has offered stock options to key employees for more than 30 years. “Many of us who have been with the company for a long time feel that the stock option is one of the key factors to Maritz’ success and growth over the years,” Goring notes. “The long-term plan is designed to help retain people and help them feel they are part owners in the business.”
As a privately held company, Maritz does not run the risk of dilution. When an employee leaves or retires from the organization, the company buys back the non-voting stock.
This article was written by Liese L. Hutchison, assistant professor in the department of communication at Saint Louis University and a free-lance writer.
