Out of options? Stock options may be out of favor, but the benefits of employee ownership never go out of style explore these alternatives - Compensation

HR Magazine, August, 2003 by Chris Taylor

(For more information on nonqualified defeated compensation plans, see "Smaller Firms Consider a New Retirement Option" in the July issue of HR Magazine.)

* Employee stock ownership plans (ESOP) These are broad-based plans in which the company contributes stock into employee retirement accounts. Pro: Employees get free stock, and the company gels a nifty tax deduction. Con: Employees can't access the stock whenever they want; as with a 401(k), they have to wait until retirement or face early withdrawal penalties. Employers--even small ones--can incur significant costs to create and maintain ESOPs.

* Employee stock purchase plans (ESPP) These plans allow employees to buy company stock through payroll deductions. Pro: Stock is usually offered to employees at a 15 percent discount, the maximum allowable by law; employers get wide equity participation at a low cost. Con: There are no guarantees that the stock will retain its value over time. And when an employee sells the shares, the original discount is treated as income. Employers may not be getting long-term commitment if employees flip their shares relatively quickly. If the program proves extremely popular, share dilution could become an issue.

* Stock purchase arrangements These plans work like an ESPP, except employees buy stock upfront with a lump sum. Pro: Hefty employee discounts usually apply here, too, and the overall cost to the employer is relatively modest. Con: Employees must have ready cash on hand to buy in, so employers may not be able to encourage much equity participation at all, especially from lower-income segments of the workforce.

* 401(k) plans This is the pre-eminent retirement savings plan, which often offers company stock as an investment option. Pro: Contributions are pre-tax, and matches in company stock are basically free money for employees; the company gets nice tax deductions for contributed stock. Con: With no federally mandated limits on company-stock percentages, employees could potentially get "Enron-ized" if they're locked in and can't dump the stock as it freefalls. Meanwhile, the company gets terrible PR about its employees losing their nest eggs.

* Share appreciation rights These are similar to stock options, except no actual shares are involved; employees get the cash equivalent of rises in the stock price. Pro: Prevents dilution of a firm's shares, and workers develop a keen interest in positive companywide performance. Con: Major potential cash drain on company finances if stock price skyrockets.

Selecting Your Options

Sorting through the plethora of employee ownership options might give anyone a headache. And while the benefits of encouraging employee ownership are clear, the road leading there can be somewhat foggy. (See "The Benefits of Striking the Right Balance," right.) Still, there are some general tips that can help guide your decision making.

The first course of action is to decide whether your organization wants to encourage wide company ownership through a broad-based plan, or ownership limited to higher-level executives.