Are Options Optional? - Industry Trend or Event

Industry Standard, The, April 2, 2001 by Anita Chabria

The market may be in bear territory, but executives at traditional companies are still piling on the stock.

Which would you prefer, 10,000 additional stock options or a raise? If you listen to the conventional wisdom these days, you'd probably take the cash and run. The notion that options are dead -- or at least a danger to your finances -- is running rampant.

But not everyone buys it. While the dot-com downturn has put some options below sea level, most employee stockholders aren't faring so badly. Workers in traditional industries, especially areas like pharmaceuticals, retail and utilities, are even seeing the value of their stocks rise despite the bear market. And even those in beleaguered new-economy sectors say that options remain an important part of their compensation, giving them a long-term investment strategy and a stake in companies they believe in.

"I would never work for a company in which there was not a material equity position," says Garen Staglin, the CEO of eOne Global, an alternative payment company in Rutherford, Calif. "I am a long-term believer that you build real net worth and align people's interest through stock options."

About 56 percent of U.S. employers participate in stock reward plans, which cover between 7 million and 10 million workers, according to the American Benefits Council. A recent study by the National Center for Employee Ownership found that the average executive receives more than 28,000 stock options, while the average technical worker gets about 3,500. The average value is more than $35,000. In Silicon Valley, the average salaried tech worker's options are worth more than $60,000.

"All that's been written about people losing their shirts is misleading, because it refers to only a small portion of the people getting options," says NCEO Executive Director Corey Rosen. "If you look at companies that aren't in the Nasdaq technology sector, their stocks are down, but not so dramatically."

Although the S&P 500 index is down more than 20 percent from its peak in March 2000, more than half of the stocks in the index are up over the last year. That old-economy stability gives some workers a sense of long-term security with their options and a hope that the tech sector downturn may not have a lasting effect.

Regardless of current conditions, execs at traditional companies still have faith in their companies. "It's a very important part of the compensation we get here," says Rick Updike, VP of business development at 7-Eleven in Dallas, about his options package. "It has long-term value to me."

Audrey Lincoff, a Starbucks marketing manager in Seattle, agrees. "There's a real sense of pride in ownership that comes with options," she says. "To be honest, right now if I had taken compensation instead of options, I don't know what I'd invest it in to get the same return in the long run."

Options grants may also give a significant return for companies -- if they grant them to the right employees. A recent study from Wharton Business School found that giving managers a 20 percent increase in the ratio of options value to salary created an almost 5 percent increase in market returns the following year. Grants to technical employees had the biggest impact on a company's performance, boosting returns by 5 percent, while grants to nontechnical workers gained companies an almost 3 percent increase.

"The results are pretty strong that if you've got a person who's a tech type at a managerial level, that's the guy you want to reward with lots of options," explains David Larcker, one of the Wharton study's authors. "If you give stock options to the value contributors of the company, then the overall performance increases a lot."

Companies could start targeting certain employees for options while cutting off others. With fewer shares to go around, the options game could once again get really interesting.