Buddy, can you spare a dime? (You can keep your stock options!)

By Mark Diorio

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During the past few years, stock options have become an increasingly popular component in nego tiating employment packages. For attracting new employees, retaining current employees, and encouraging company longevity and loyalty, stock options have been key. This was especially the case during these past years when unemployment dipped under two percent, and retaining a strong workforce was quite a challenge.

Right now, however, there are many employees holding sizable stock options who once thought that these options would quickly make them rich beyond their dreams. But all that glitters is not gold. The stock options they received are, in many cases, worth much less than what the employee paid or would pay for them. To put it bluntly, they aren't worth a dime.

So How Much Did You Negotiate?

Imagine that you are a recently recruited employee. Your employer targeted you as perfect for a position. Headhunters said you were a mover and a shaker and put offers on your plate. You were in the catbird's seat, coveted, playing hard to get. You negotiated… and, of course, asked for more options. Ultimately, you chose a less-than-perfect employer in part because they provided a significant stock option bonus.

Once the employment deal was done, you began your new job with the grit and determination of a young millionaire in the making. Sometimes, just sometimes, this dream works. But other times, it is a nightmare.

A Gift with Good Intentions

So what are stock options? Stock options provide an opportunity for individuals to acquire stock at a predetermined price over a set period of time, usually one to three years. They are intended to cement a company's future by aligning the interests of employees and managers with those of the shareholders.

According to the Wall Street Journal, it is not unrealistic for presidents and CEOs to hold 6 to 10 percent of company stock in options, with the actual percentage based on the company's stage and stability. Senior vice presidents reportedly receive 1 to 3 percent of company stock, with the marketing and sales guys getting the higher end and the engineering and finance guys getting the lower end (they say top-notch sales and marketing executives are just harder to find).

Vice presidents and key managers can receive 0.5 to 2 percent in stock options, depending on roles and contribution levels. It is important to recognize that the actual company percentage someone obtains in options is much less important than its potential value. And many in our industry, at all levels, including clerical support, received options from their employers during the past few years.

The extent to which people received options may not be all that important; what matters is that, in most cases, stock options represented utopia. For many employees, it represented a dream that if they worked hard and helped the company achieve its goals and successes, they would be rewarded handsomely.

Now don't get me wrong – there are some excellent companies that gave employees fairly priced options. It is strictly unfortunate that the stock market suffered a downturn and, consequently, many company shares have become unjustly devalued. Consequently, set option prices are no longer an attractive employee incentive. In this case, everyone suffers – from the CEO on down.

What has happened in the market and to employees' options has been an unavoidable and unintentional situation. Unfortunately, there were companies that, as they approached an IPO and made stock option offerings to employees and associates (including customers), inflated option prices so much that they placed individuals in a negative gain position after the IPO.

Negotiating in 2001

So how are employers keeping their employees happy now? Re-pricing stock options can be quite messy from an accounting standpoint. Some companies are just issuing more options to their employees at significantly lower prices. For employers who believe that keeping a staff happy and focused is a fundamental element of continuing to build shareholder value, new stock options at lower prices is the best alternative. It is also the only sensible alternative for companies that have suffered a poor IPO performance.

Re-writing that Résumé

So if you happened to be one of the few who made out on stock options, then great! Good for you! But if you are now working for a not-so-stellar company, holding handfuls of worthless options with no new ones in sight, then you have picked up another good life lesson. You've already learned that you may just want to be more careful the next time around.

MARK DiORIO, chief executive officer, can be contacted at MTBSolutions Inc., 1630 Oakland Road, Suite A102, San Jose, CA 95131-2450; 408-441-2173; Fax: 408-441-9700; E-mail: [email protected].


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