In the past, it has been fairly common for many companies and corporations to offer their employees stock options. In fact, many employers considered this to be a great way to ensure that the views and ethics of their employees aligned properly with the ethics and goals of the company they were working for. After all, owning stock in a company is the equivalent of allowing all those who take part in the option the ability to share in the company’s growth. It would appear then that those participating in accepting stock options would have a greater incentive to see the company experience growth and success.
Recently, however, more companies than ever before are discarding previous options they had in place for offering stock to employees. Why is this occurring on a large scale throughout America? What are the pros and cons of offering stock options to employees? Is there a workable solution that might keep both parties happy in this situation? The information below was designed to answer these questions in more detail.
Benefits of Discontinuing Stock Options
It might seem to outsiders that the reason some companies are discontinuing the offering of stock options is simply to save money. That is usually a part of the picture, but it goes much deeper than this. The following list covers some of the most frequently reported reasons for the discontinuation of stock options.
* Stock Values are Unpredictable
As with anything associated with the stock market, participants generally realize that the results are very unpredictable. No one can accurately judge the potential for a company’s growth or long-term success. Moreover, the majority of employees recognize this fact as well. It leads many to be unsure of whether or not to take part in stock options or to distrust that it will be worth their while to participate even if it is offered to them.
* Employees Have Grown Increasingly Skeptical of Stock Options
Stocks can seem almost as unsafe and unsure as casino tokens to many employees. How does the employee know what that stock is going to be worth five or ten years down the line? Most employees express the desire for a compensation plan they can have complete faith in. Stock options simply do not fit that criterion for many, as they feel they are taking too big of a risk in participating.
* Offering Stock Options Raises Company Expenses
Offering stock options at a reduced rate for employees costs the company money. These expenses are not just related to discounting the stock, but also in terms of the cost of reporting the expenses, the additional overhead, and employing an appropriate financial advisor who can handle all the leg-work this process involves. If many employees are opting out of participating in the first place, a company might see doing away with stock options as an easy way to cut expenses.
While these points don’t necessarily cover all the drawbacks associated with offering stock, these three factors are the most common reasons that companies discontinue this option. That said, there are many benefits to providing stock options for employees. For those companies that are still trying to decide where they stand on the issue, the following benefits associated with offering stock options should also be carefully weighed.
Benefits of Providing Stock Options
With so many companies doing away with stock options, it can be hard to remember that there are real benefits involved in keeping this option in place. What are some of the positive aspects of offering stock to employees?
* Stock Provides Equal Benefits
Stocks are relatively easy for most employees to understand. Additionally, there is no concern about the company being seen as unfair by favoring some employees over others. The value of the stock will apply equally to all employees who take part in it, no matter what their position or rank is at the time. There are few other company perks that are completely equal across all groups of people participating.
* Stocks Encourage Better Employee Behaviors
Stocks are only beneficial to an employee if the company experiences success and growth. After all, this is exactly how these stocks are going to continue increasing in value. Therefore, it makes sense that employees taking part in stock options are more incentivized to perform actions that promote the success of the company overall. This can be very good for the overall bottom line of the company for the foreseeable future.
* Stocks are Less of a Tax Burden for Companies
The Internal Revenue Service puts many regulations in place regarding employers offering equity options to employees. It is much more cost-effective for the majority of companies to offer stock options than it is to offer other options.
Possible Implications for a Workable Intermediate Solution
With both positive and negative aspects to offering stock options, many business owners are left unsure of the best plan of action to take. Some are afraid to discontinue the option but are ultimately unsure of whether the expense is worthwhile in the long run. What is the solution to this complex issue? The answer may lie in a stock option strategy known as ‘knockout.’
The ‘knockout’ strategy involves offering stock options with some stipulations and time constraints in place that lowers the expense for the company and incentivizes the employees to participate at the best time. ‘Knockout’ stock options have specific time limits placed upon them and requirements that the investor must stick to in order to take part in the offering of them. Additionally, the employee will lose the stocks if the value falls below a specific set amount. ‘Knockout’ stock options give employers a powerful incentive to provide strong stock options to their employees and encourages employees to act at the right time when it will best benefit both parties. This option doesn’t solve all the problems associated with offering stock options, but it drastically reduces some of the biggest issues and is a workable solution for the satisfaction of both parties involved.
About Jeremy Goldstein
Jeremy Goldstein is a successful attorney with Jeremy L. Goldstein & Associates LLC. Jeremy Goldstein and his colleagues specialize in serving the legal needs of businesses and corporations, both large and small. This applies to such issues as corporate governance matters and employee compensation issues.
Jeremy Goldstein boasts a successful legal career where his expertise has influenced the outcome of some of the largest and most well-known cases of our time. These include cases involving Duke Energy, Cingular Wireless, NYSE Group, JP Morgan Chase, and many others. Jeremy Goldstein also makes use of his spare time to speak publicly on such topics as corporate governance and employee compensation issues in an effort to help both employers and employees to enhance their respective roles. Jeremy Goldstein continues to lend his expertise to the world of business and employee management, helping others to experience success.
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