Broad-Based Stock Options

Stock options, once the exclusive privilege of top executives, have been working their way down the power hierarchy. Increasingly, companies are moving toward broad-based plans [wherein over half the employees receive and hold options].

Eighty percent of the companies responding to the National Center for Employee Ownership (NCEO)'s latest survey offer options on a broad-based basis. Three-quarters of these companies grant options every two years or less [half of them make annual grants]. On average, the options go to 89% of salaried technical employees, 88% of nontechnical salaried employees, and 76% of hourly workers.

Before you conclude that broad-based stock option plans are really popular and the way to go, you should know that the survey findings are based on 247 responses out of ±5,000 companies contacted. Of the 247:

  • 145 are publicly traded companies
  • 84 plan to go public within two years

NCEO estimates that it took three or more hours to complete the questionnaire [respondents had a strong desire to participate].

Insofar as the sample is small, it is not statistically representative of ALL companies, but it MAY be valid for companies with broad-based plans (NCEO believes it to be).

Overall, the study showed that options are distributed as follows:

Executive management 28,518 76%
Mid-level managers 4,894 13%
Technical employees 3,447 9%
Hourly employees 786 2%

(There's nothing surprising about THESE numbers!)

Nearly 20% of outstanding shares are available for current and future options.

Today, the options picture is not as rosy as it was at the end of the last millennium. Vast numbers of options are under water. Former overnight-millionaires-in-waiting -- and their employers -- have learned (or re-learned) a painful lesson: Unless refreshed, or regularly issued, options are a huge gamble. Barring special circumstances, they should NEVER be used to offset non-competitive rewards.

There is evidence that:

  • stock option grants promote decisions aimed at increasing SHORT-term share value, rather than LONG-term business success, and
  • stock option plans can excessively dilute stock ownership value and voting-power

In an upcoming article, we'll examine this situation and suggest ways to create employee "ownership" with less risk and increased performance -- aligning the interests of employees and shareholders.