According to Jeremy Goldstein, stock options are on the way out, but there’s an alternative that may be a better choice. It’s become common for corporations to choose not to offer stock options to their employees. The reason given is often to save money, but the underlying reason for the trend are market volatility.
When stock prices go down, employees lose the ability to exercise the options, but they stay on the books and continue to incur accounting costs. This has made employees less than enthusiastic about stock options. At the end of the day, it may be more cost effective to pay employees a higher salary than carry the costs of options that are underwater.
These problems have begun to make stock options less attractive to employees in recent years, but this doesn’t mean they should be abandoned. Stock options add an incentive to the employee to work for the betterment of the company. When the company succeeds and its stock price rises, the employee is rewarded by stock options. This encourages employees to work hard to satisfy their customers.
Another advantage to stock options is that they are not subject to the same IRS rules that apply when stock is given to employees as compensation. The employer can end up with a greater tax burden if they do this, as opposed to stock options, which don’t count as actual ownership of stock.
Jeremy Goldstein’s solution avoids these problems and keeps the advantages to stock options. It’s called a knockout option. By adding a clause to stock options that causes them to expire if the stock price drops too far or for too long, the cost of keeping useless options on the books is eliminated. It also retains the incentive for employees to work towards the company’s success. Learn more: http://officialjeremygoldstein.com/philanthropy/
Jeremy Goldstein is a partner at the boutique law firm bearing his name, Jeremy L. Goldstein & Associates LLC. The firm consults with corporate compensation committees, CEOs, and executives to resolve sensitive situations and transformative events. He has worked with clients involved in large corporate transactions, such as United Technologies’ acquisition of Goodrich. Jeremy Goldstein is also chair of the Mergers & Acquisition Subcommittee of the Executive Compensation Committee of the American Bar Association Business Section.