Share this Page URL

Lesson 2. Why Options Are Important - Pg. 6

6 Chapter 2. Why Options Are Important In this lesson, you will learn how employee stock options can be an important part of your compen- sation package and help build a solid retirement program. Options as Compensation Employee stock options are a part of the compensation package of many key executives and have been for many years. A careful reading of annual reports often reveals that a majority of a top executive's compensation is in the form of stock options or some form of equity compensation. Unfortunately for shareholders these plans often reward top management even when the company did not do well. Top management of a company is directly responsible to the shareholders through the board of directors. Stock options that become available in the future tend to align the management's interests with those of the shareholders; at least that was the theory. Shareholders want to see growth and profits now, which normally leads to an increasing stock price. This scenario rewards management who have most of their compensation dependent on a rising stock price. In recent years companies have realized that all employees have something to contribute to the well-being of the company. This has led to an explosion in employee stock option plans that cover most if not all employees. Do employees work harder when they are part of an employee stock option program? The evidence is inconclusive, but it is clear that the programs are gaining popularity. Tip Broad-based employee stock options may or may not motivate workers, but they can't hurt because they give workers a chance to participate in the company's growth without risking any of their own money. High-tech industries are largely responsible for the rapid rise in broad-based employee stock option programs in the past 10 years. They were among the first to realize that one of their greatest assets is the intelligence of their employees. Of course, other factors are involved as well. Many of the Internet wunderkind of today ran garage- based operations just a few years ago. They often paid most, if not all, of their employees in stock and options because they didn't have the cash. Employee stock option programs are extremely flexible, which allows companies to target different goals with different option programs. For example, a company could reward the sales department with options for meeting their quotas.