Roughly 10 million U.S. employees now receive stock options, almost a tenfold increase since 1992, according to The National Center for Employee Stock Ownership (NCEO). Once used mainly as perks for top executives, options are now usually distributed to all company employees, from middle managers to administrative assistants. An NCEO survey conducted last year found that 80 percent of companies that received venture funding provided options to nonmanagerial employees.
Even trends haven't dissuaded an increasing number of employees from accepting stock options as part of their compensation. Many gladly trade lower salaries for larger option packages. Options are considered so desirable that lawyers, ad agencies, headhunters and even landlords have taken to requesting them along with — and sometimes in place of — traditional forms of payment.
According to EE Times' "2001 Worldwide Salary & Opinion Survey," over 50 percent of respondents own stock options in their company of under $10,000, and a further 21 percent have options worth between $10,000 and $49,999. While almost 70 percent of respondents still believe that options are an effective tool for attracting engineers to new jobs or keeping them with their current employer, many may not realize the cost of cashing in.
When employees exercise their options, the difference between the price of the option and the market price of the stock may be considered taxable income for that year — perhaps even subject to payroll taxes. If the employee doesn't sell the stock at the same time the option is exercised, any further gain is subject to capital-gains taxes.
As employees become increasingly concerned about the fall in valuation of their stock options, companies are trying to find alternatives to bolster the value of share-based benefits. The main choices are to grant new shares, to cancel existing options and regrant them or to rebase the share option value. Of those methods, rebasing options is the most challenging for businesses.Rebasing means the price of the options is decreased — often to the current market price. British equipment manufacturer Marconi is one of the most recent companies to rebase its share options and with it, sparked a shareholder backlash.
Cancelling existing options and regranting them is a method that was recently applied by Nortel Networks. In June, the company announced an options exchange plan for employees when stock that had been offered at values ranging from $18 to $89 a share had plummeted to less than $14. Regranting options can tie employees to a company and also presents employees with a valuable benefit over a long period of time. As businesses try to hold executives, cash bonuses are also becoming more prevalent.
While stock ownership may carry great rewards since few people accumulate wealth on salary alone, it is worth remembering that traditional benefits such as training, medical coverage and insurance may now be the smarter way to attract and retain talented employees.
Stephanie Gordon is community leader for www.theworkcircuit.com.
