Opt out: stock options aren't the only way to pay

Entrepreneur, March, 2003 by Julie Monahan

THREATENED REGULATION and shareholder disdain haven't stopped the flow of stock options into executive compensation plans. But a subtle shift is still underway to reposition stock options as just one part of a more traditional pay package.

This approach emphasizes compensation strategies such as pay-for-performance bonuses and restricted stock that tie financial rewards to individual and corporate success. Restricted stock, for one, slows the greed factor associated with options by staggering vesting periods and, in some cases, requiring employees to pay for the stock.

Unlike options, which don't cost employees anything until they are exercised, restricted stock makes employees more invested in long-term corporate performance. "Restricted stock starts with a value," says Bill Coleman, senior vice president of compensation at Salary.com in Wellesley, Massachusetts. "An option on its own isn't worth anything."

Compensating strategies also connect performance and an employee's financial interests if it's done right. Rewarding an executive with a cash bonus for a jump in new customers leaves too much room for acquiring those customers at any price. A smarter plan puts conditions on reaching goals by limiting the cost of achieving them and requiring direct increases in revenue. "Be sure you're not creating incentives that make your executives act against the company's best interests," Coleman says.

Reassessing financial incentives represents an opportunity for a review that sweetens compensation while maintaining fiscal health. Perks such as flex time, help with child and elder care, sick days, free warehouse-club memberships and continuing education convey corporate concern for employees' lives outside of work in a way that shapes attitudes at work. "These are quality-of-life benefits employees favor," says Diane J. Fuchs, an attorney at the employee benefits practice group Womble Carlyle Sandridge & Rice PLLC in Washington, DC.

But even as companies tweak their compensation packages, stock options will likely remain an important part of the mix. Says Fuchs, "I don't think executives are going to let them go."