Traditionally, stock option plans have been used as a way for companies to reward top management and "key" employees and link their interests with those of the company and other shareholders. More and more companies, however, now consider all of their employees as "key." As a result, there has been an increase in the popularity of broad-based stock option plans, particularly since the late 1980s.
Broad-based stock options are now the norm in high-technology companies and are becoming popular in many companies in other industries as part of an overall equity compensation strategy. Larger, publicly traded companies such as Pepsico, Starbucks, Southwest Airlines, and Cisco now give stock options to most or all of their employees. Many non-high tech, closely held companies are joining the ranks as well.
As of 2001, the NCEO estimates that up to 10 million employees receive stock options. Other research confirms this trends. Research by Joseph Blasi at Rutgers University found that 97 of the top 100 e-commerce companies offer options to most or all employees.
A 2003 WorldatWork study showed that options are popular in all kinds of public companies, with 15% of public companies offering options to most or all employees.
What Is a Stock Option?
A stock option gives an employee the right to buy a certain number of shares in the company at a fixed price for a certain number of years. The price at which the option is provided is called the "grant" price and is usually the market price at the time the options are granted. Employees who have been granted stock options hope that the share price will go up and that they will be able to "cash in" by exercising (purchasing) the stock at the lower grant price and then selling the stock at the current market price. There are two principal kinds of stock option programs, each with unique rules and tax consequences: non-qualified stock options and incentive stock options (ISOs).
Stock option plans can be a flexible way for companies to share ownership with employees, reward them for performance, and attract and retain a motivated staff. For growth-oriented smaller companies, options are a great way to preserve cash while giving employees a piece of future growth. They also make sense for public firms whose benefit plans are well established, but who want to include employees in ownership. The dilutive effect of options, even when granted to most employees, is typically very small and can be offset by their potential productivity and employee retention benefits.
Options are not, however, a mechanism for existing owners to sell shares and are usually inappropriate for companies whose future growth is uncertain. They can also be less appealing in small, closely held companies that do not want to go public or be sold because they may find it difficult to create a market for the shares.
Stock Options and Employee Ownership
Are options ownership? The answer depends on whom you ask. Proponents feel that options are true ownership because employees do not receive them for free, but must put up their own money to purchase shares. Others, however, believe that because option plans allow employees to sell their shares a short period after granting, that options do not create long-term ownership vision and attitudes.
The ultimate impact of any employee ownership plan, including a stock option plan, depends a great deal on the company and its goals for the plan, its commitment to creating an ownership culture, the amount of training and education it puts into explaining the plan, and the goals of individual employees (whether they want cash sooner rather than later). In companies that demonstrate a true commitment to creating an ownership culture, stock options can be a significant motivator. Companies like Starbucks, Pepsico, Cisco, and many others are paving the way, showing how effective a stock option plan can be when combined with a true commitment to treating employees like owners.