For the last couple of years the media darlings were the stock options millionaires, who were living a coveted life, but on paper wealth.
More recently, the media focused on the former millionaires who have millions in tax liability that they are struggling to pay because the stock market had dropped precipitously since they exercised the options.
First as the symbol of the dotcom boom and now the dotcom bust, one might expect the demand for employee compensation to increase for cash and decrease for stock.
That is not the case according to a report recently published by the National Center for Employee Ownership (NCEO). The publication of this paper is very well timed: members of Congress will soon be considering legislation to expand the ability of companies to offer equity participation plans including stock options plans to more of their rank and file employees.
According to the NCEO project director for the study, Ed Carberry, “The tight labor market, the change in corporate culture to a more participative decision-making model, and increased interest in sharing equity among employees will all continue to drive the spread of these plans.”
Furthermore, a soon-to-be-released study by professors at the Wharton School of the University of Pennsylvania suggests that companies seeking to boost their performance with employee stock-option grants should concentrate them on middle managers and technical specialists.
They found in more than 200 New Economy companies that pay middle managers 20% more in options than comparable companies, performance increased and stock prices rose an average 5% faster a year. Similar results were seen when companies paid their tech personnel at least 20% more in options. Large grants to top executives had little effect on stock performance.
The NCEO’s study, Current Practices in Stock Option Plan Design, reports findings from their survey of 500 public and private companies.
Of the responding companies, 80% offer stock options to employee on an ongoing, periodic basis. The typical company grants stock options to 76% of hourly employees, 88% of salaried non-technical employees, 89% of salaried technical employees, 92% of middle managers and 96% of senior executives.
One-time grants are no longer as popular as they once were. The grants are still popular in some smaller companies (40.5% of the companies with 101 to 200 employees) but not popular in the computer equipment (10.5%), or e-commerce companies (9.7%), on the West Coast (8.7%) or in Silicon Valley (11.8%).
Interestingly, about 34% of companies grant options on an automatic, set-time interval basis. Discretionary grants are more likely to be used by small companies. For instance, companies with 100 to 2,300 employees use them 75% to 84% of the time.
Private companies use discretionary grants about 70% of the time for non-management employees, while public companies do so only about 55% to 59% of the time
Studies similiar to the NCEO and Wharton tell an important story that will help refute some of the popular misconceptions. Stock options are an important tool for small, high-growth companies in the New Economy. Expanding their use should be a priority for policymakers.
To this end, there are several pieces of legislation before Congress concerning the improvement and/or streamlining of the incentive for employee stock options.
One bill that attempts to tackle the problem of tax liability associated with incentive stock option being liable for the alternative minimum tax (AMT). HR 1487 introduced by Representative Zoe Lofgren (D-Calif.) would repeal the AMT treatment of incentive stock options, thereby changing the taxable event from the exercise of the stock option to the sale of stock. Changing from the exercise date to the sale date would have profound benefits for our ability to retain and attract high-tech workers.
Representative Amo Houghton (R-N.Y.) will soon reintroduce Universal Employee Stock Option Act of 2000. The bill adds a new category of options that may be granted pursuant to an employee stock purchase plan (ESPP). Under this bill, employees would use payroll deductions (after-tax, under current law) to purchase shares of the employer company. Unlike traditional ESPPs, which allow an 85% of value exercise price with a “lookback” feature, the exercise price of the new options may not be less than 100% at the date of grant. The term of the payroll deduction period, however, can be as long as five years and must be at least 12 months.
Finally, the Wealth Through the Workplace Act of 2000 introduced last year by Congressman John Boehner (R-Ohio) will also be on the table this session. The bill creates a new class of “super stock options” for employees and directors of public companies.
Thus, given the interest of employees and the benefits to companies, we can look forward to continued use of stock option programs by companies and legislation aimed at improving their structure and availability. t
John Huntz is a managing director at Fuqua Ventures LLC in Atlanta. He is also a member of the Board of Directors of the National Venture Capital Association.