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

"Ask yourselves, 'What are we trying to accomplish?'" advises David Wray, president of the Profit Sharing/40l(k) Council of America in Washington, D.C. "Some smaller companies might want to make everyone an owner, to make them full partners in the enterprise. Others might want to give employees a small stake, but not hand over control. Still others might want to give senior management a big stake in the outcome to help ensure that the company appreciates in value." (Such a decision might also depend in part on the employee ownership options you already have in place. For more information, see "Three's Company" on page 50.)

ESOPs, ESPPs, stock purchase arrangements, 401(k) plans and share appreciation rights are the usual vehicles for broader initiatives. Restricted stock, delayed issuance awards, performance shares and nonqualified deferred compensation are often--though not always reserved for the executive suites.

Restricted stock and performance shares, in particular, are generating a lot of buzz these days, thanks to two main trends: Companies want to give an award that will always be of some value, and they also want to recognize top performers.

"There's a great deal of talk in those areas," says Janich. If your primary goal is to boost company earnings--a key driver in tough times--performance shares may be the best way to go, he suggests.

Telecommunications company Verizon, for instance, has tried restricted stock, which vests based on performance relative to the Standard & Poor's Index and other telecom stocks. It's a simple equation: "If the company doesn't perform well, compensation is held back," says Blair Jones, a senior vice president at Sibson Consulting ha New York.

On the other hand, if your goal is a broader initiative--getting everyone, at all levels of the company, to think like an owner--"there's a movement toward ESPPs," says Janich. These plans are comprehensible and popular, and they are administered through simple payroll deductions.

Offering company stock in the 4,0l(k) plan is another easy way to achieve the same goal of broad employee ownership.

If you have a bolder goal of giving some corporate control to your employees through voting privileges, an ESOP is "clearly the way to go" says Wray. Smaller companies, especially might be attracted to this option, he says, because employees can actively participate in the direction of the company, and the workforce size hasn't yet made that prospect unwieldy. Also, the tax benefits are too juicy to pass up since firms get a full tax deduction for the stock offered, increasing their cash flow.

Public vs. Private

One of the biggest considerations in deciding which vehicle or combination of vehicles to use is whether your company is public or private. The whole idea of stock valuation, for instance, becomes trickier when it isn't being traded on the open market.

However, that doesn't mean "stocks" aren't a feasible option for private companies: Privately owned Spring Valley, Calif.-based catalog firm Chinaberry, for instance, has an appraiser come in once a year to determine its value, and the board then sets the discounted price at which employees can buy actual shares.