Keeping Employees the Financial Way

Electronic News, Oct 9, 2000 by Richard Bruener

Stock options are gaining ground

Seduction is a daily event in human resource departments throughout the high-tech industry.

No, not the kind that can lead to charges of sexual harassment, but friendly persuasion intended to attract the best and brightest to a semiconductor company or other electronics firm.

The bait: stock options. They have become so pervasive in the high-tech sector that they are now part of what defines the industry.

iQuantic, a compensation-consulting organization with headquarters in San Francisco, surveyed 246 high-tech companies about their use of stock options as a way of recruiting and rewarding much-needed employees. Taking part in the survey were many semiconductor companies including 3Com, Advanced Micro Devices Inc. (AMD), Agilent, Alcatel, Dallas Semiconductor, HewlettPackard, IBM, Intel, Lucent Technologies, Motorola and Texas Instruments. iQuantic concluded that the high-tech industry is unique in the United States because its stock options are offered to a broad swath of employees, whereas other industries almost always give stock options only to the top executives and managers.

However, iQuantic believes that such a distinction between new economy companies and those of the old economy won't last long. In its report, Trends in Equity Compensation, the consulting group wrote that old economy companies are starting to feel pressure when they need to staff their internal IS functions and other hot jobs, especially when they are hiring for their own e-commerce ventures.

Thus, the high-tech industry is reshaping the economy not only through its products but also through the way it rewards and recruits employees. What iQuantic calls "the Equity Economy" is quintessentially part of the new economy with an impact not only on semiconductor and other high-tech firms, but also on the old economy.

And the use of stock options as a way of compensating employees continues to grow among electronics companies. Hardly any start-up takes on new hires without offering stock options.

"New cash-poor (but equity-opportunity rich) companies are emerging daily and are luring the risk-takers from their more established brethren," iQuantic reports. Because the need for intelligent employees has eclipsed the need for fiscal capital, the historic balance between finance and folk has shifted toward people at start-ups and to a lesser extent throughout the new economy, according to iQuantic.

And start-ups aren't the only companies using stock options. "Today, the percentage of high-technology workers receiving regular grants of stock options is 30 to 50 percent higher than it was only four years ago," the iQuantic report said.

But not everyone within a company, especially a large firm, is going to be offered stock options. If you are a nonexempt employee -- someone eligible for overtime wages -- your chances of being offered stock options are better in a smaller company.

"This may stem from two sources -- smaller companies tend to have less of a barrier between exempt and nonexempt employees, and larger companies are more likely to have unions, which would insist on options being a negotiated item," the report said.

AMD, for example, does not offer stock options to its nonexempt employees. "The stock options are widely granted," an AMD spokesman said. "The threshold goes well below the senior executive level. Certainly everybody at the director level and many people who are professional employees are covered by the stock-option program."

But AMD provides a different incentive for nonexempts. "Everybody in the company is eligible for a stock purchase plan, which gives them an opportunity to purchase stock at below market rates and realize gains on that," the spokesman said. "Everybody in the company participates in profit-sharing, but the stock-option plan goes to all managerial and professional employees above a certain threshold. We have other programs we believe keep us competitive in that arena," the spokesman said. "Of course the purpose of both these programs is to align the employees' interest with that of the shareholders and those programs only work if the stock price goes up. So it makes everybody work hard to achieve good results."

Within the high-tech industry, semiconductor companies are more likely to have large numbers of nonexempt employees and are the least likely to offer options to them. But that may be changing, said iQuantic. "Simply stated, options have migrated from the offices (in the last five years) to the cubicles and are rapidly spilling onto the shop floor.

"(Despite this growth) most companies are doing an inadequate job of explaining to employees the potential value of their options and how much value their employees could be sacrificing in the name of capitalizing on short-term gains," iQuantic said. "(Employees tend to) think of their options as a commodity -- 3,000 options are 3,000 options, whether they are from Cisco or Yahoo or Shnoggs.com. This, of course, isn't true. (But) what most employers aren't doing (72 percent of them, in fact) is communicating to their employees that stock options are part of their total compensation and have a value relative to salary and bonuses."