Upper Saddle River, N.J. - August 2004 - A recent article by Daniel Kadlec in the Inside Business section of Time Magazine offered some very disquieting predications. The premise of the article is that as companies react to the proposed requirement by the Financial Accounting Standards Board (FASB) to expense stock options, they will limit the issuance of options to a smaller, elite segment of employees. By limiting stock option grants to executives, the article suggests that companies will experience lower financial performance. In response, the author cites a number of well-performing companies with broad-based options plans. Nevertheless, this article brings up the age-old question of “which came first”: do companies that perform well provide broad-based stock plans, or do broad-based stock plans result in better company performance? No matter which side is taken, stock programs, and particularly broad-based ones, can play a significant role in how a company achieves its business objectives.
However, the issues are not as cut and dried as may have been portrayed. Companies were already starting to cut back on the issuance of broad-based stock options when they realized that “underwater options” (i.e., those whose value had fallen below the exercise price) were very demotivating. There has been a growing trend by companies to issue restricted stock in lieu of, or in conjunction with, smaller option grants. The issuance of fewer options is also overshadowed by the FASB expensing requirements, as well as the concerns by shareholders and institutional investors about the increasing percentage of shares that have been allocated to provide those options. These shares, referred to as “overhang”, have grown over the last decade from single digits to 15% or more, and in the case of high-tech companies, to over 20% of outstanding shares. Lastly, the results of a number of studies have shown that, in many instances, employees do not hold the stock once exercised, but merely “churn it” to gain the immediate appreciation; as a result, they lose the potential tax benefits and continued company tie-in of long term possession.
We believe that employee involvement can make companies more successful. This involvement will come about not only through participation in stock option programs, but by increasing their interest in the company’s success, brought about by good communication, fair and equitable treatment, challenging career opportunities, training and advancement, and recognition and rewards that allow them to share in competitive compensation tied to aggressive but attainable results.
