According to Jeremy Goldstein, most corporations have opted to stop providing stock options to employees as a form of compensation. Though most of the firms withdraw from giving this form of compensation to save money, there are more complex reasons for the withdrawal.
Stock options have three main disadvantages. At times, the company’s stock value can decrease significantly thus making it impossible for the staff to exercise their options. Regardless of this, the business will be required to report the related expenses, and stockholders face the threat of option overhang. Most employees are very cautious of stock options. They understand the fact that economic downturns render their options worthless. In addition, employees don’t regard options benefits as valuable compared to the higher salaries the company would pay them should the options be eliminated.
Despite its demerits, stock options also have several advantages to the company, the stockholders, and the employees. They are preferable to other compensation methods such as additional salaries, better insurance cover, or equity because they are easy to understand. The employees’ personal earnings can only increase if the company’s share value increases. This acts as a motivation to the staff to prioritize the company’s success.
If a company wants to continue providing stock options, it must take the necessary steps to reduce overhang and the initial as well as the ongoing expenses. The best solution for companies is to adopt a barrier option referred to as knockout. Not only do these stock options have same vesting requirements and time limits as their equivalents, but also employees are prone to lose them if the share value drops under a set amount. The knockout mechanism will minimize the initial accounting costs if the firm’s stock is relatively volatile. In addition, non-employee investors do not face option overhang threats if the company adopts knockout options benefits.
Jeremy Goldstein has served as a business lawyer for over a decade. Prominent corporations turn to him when they need legal advice concerning employee benefits. Jeremy studied at the New York University School of Law, the University of Chicago and the Cornell University. He is competent in areas such as mergers, corporate governance, venture capital, private equity, employment law, and corporate finance.
Jeremy founded his law boutique firm and named it Jeremy L. Goldstein & Associates LLC. Before establishing his company, he was a partner at the Wachtell, Lipton, Rosen & Katz Law Firm. Jeremy is recognized as one of the executive compensational lawyers in The Legal 500 and the Chambers USA Guide to America’s Leading Lawyers for Business.
Follow Jeremy Goldstein on Facebook.