Employee Stock Options?

Evil Butters asks: "ComputerWorld has an interesting article regarding the decline of Employee Stock Options. Long gone are the days when companies would pass out stock options like toilet paper (as you were lucky if it was worth as much). Since most of us are probably in IT related fields, is anyone seeing any turn-around in compensation packages -- especially for IT folk? Everywhere I look, companies are still cutting back and finding reasons why compensation does not need to be increased (except for CEO's of course) no matter what your performance is like. But according to the article, 54% of the top S&P 250 companies are (at least) using restricted stock as performance perks, etc."

Taxes...

[Duncan3]

This is all about the taxes, and accounting. Options were great because they were paid for by investors, not the company. That's changing soon.

Now they need ways to pay non-salary money, that comes from nowhere - print more stock!. And they may as well do things that keep you around longer as they do it. Luckily, printing more stock still doesn't cost the company any money, it's from the current investors that get diluted.

It's getting really hard to pay your workers with other peoples money!

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[account_deleted]

Comment removed based on user account deletion

A job is not a lottery

[JanneM]

I don't really see the great charm of stock options, specifically as part of your employment renumeration. Options are a crap shoot even at the best of times - a lottery if you wish. Since you're depending on it for stuff like food and housing, work compensation should be as predictable as you can make it. You want to reward me at an IPO - set me up for a hefty end-of-year bonus instead.

You want excitement - use a bit of your own salary to buy a lottery ticket (or some small-business shares). Or start a business of your own, and get all the pre-IPO excitement you can handle.

My company's method

[Wizarth]

I like how we do it here. When income goes up, so do the wages. Could make it interesting if/when profit goes down again though.

Re:One DNF in hand is better than two pre-ordered

[mordors9]

But being able to buy a 9 year old stock option when it has more than tripled in value is pretty sweet. Plus you tend to keep it then. This leads you to accumulate wealth rather than piss it away on the latest doodad or geegaw. So it is good for you and your company. You company benefits because it does change your outlook when you own a good sized portion of your company. Of course the down side is obvious. If the stock hasn't gone up since it was issued.... well you know. That sucks then.

I think the problem is...

[Audacious]

I believe that the problem is that there are a lot of other areas which need to be addressed first before stock options are even considered. First (and foremost in my mind) is health insurance, dental insurance, vision, and so forth. My wife and I are having a hard time trying to decide on what kind of insurance to get. This is because of the $1,400.00 she is bringing home, almost $400.00 of that is presently going towards insurance.

After looking up insurance, sure you can get $200.00 med insurance, but then it has a $10,000.00 deductible on it! Since we pay out maybe $2,000.00 a year max for medical costs this doesn't make sense.

Coupled with the rising cost of gas, electricity, and food in general - the average joe is thinking more along the lines of "Am I going to have enough money to even eat?" let alone think about stock options which, in some cases, are better used as toliet paper.

Speaking of taxes (as per the election where everyone kept saying that they were not going to raise taxes to pay for everything) - think of this: Every time the feds print more money it is an invisible tax upon you. Because the more money there is in circulation - the less that money in your pocket/bank/whatever is worth. So Mr. Bush doesn't have to raise taxes - he can just print up some more money and ta-da! You have just been taxed! And ya know what? They don't even have to ask Congress for permission to do so.

Re:Taxes...

[hazem]

Now they need ways to pay non-salary money, that comes from nowhere - print more stock!. And they may as well do things that keep you around longer as they do it. Luckily, printing more stock still doesn't cost the company any money, it's from the current investors that get diluted.

It doesn't cost them much today. But tomorrow, when they need to raise more capital, the market will not value their stock as highly because potential investors will be afraid of being dilluted again. If you can't get enough capital, you have to go for loans/bonds.

It's easy to cheat in a one-turn game. But it eventually catches up to you when you have to keep playing.

Re:Please..

[TamMan2000]

When there are more people than jobs, they don't have to pay you what you're worth, because there's someone out there, probably equally or more qualified, willing to work for a lot less.

On the contrary, they have to pay you exactly what you are worth, you are just worth a lot less than you think you are... Your worth (at least in $ terms) is defined by the market.

Re:Please..

[Marxist Hacker 42]

Heck, no longer includes options is the least of my worries- no longer includes health insurance is becoming just as common.

Re:One DNF in hand is better than two pre-ordered

[Anonymous Coward]

You're essentially getting paid in risk rather than money. You're taking the risk that your bonus will be worthless, vs. the possibility that your options will have tripled in value at some time in the future.

I think for most of the people I've worked for, I'd rather have $1 now than the possibility of making either $0.01 or $3 in the future.

Delusion or dilution?

[clone22]

In a meeting with a potential investor in a startup I was with, he made a great point: "It's easy to sit in a room with a bunch of other folks and delude yourselves into thinking you've got a great idea".

So what if the company provides stock options? What are the realistic expectations the company is going to be successful enough for the options to ever be worth anything? Will your seemingly large position be increasingly diminished as new investor money dilutes the share pool? Would you be better protected with a restricted stock grant? Look at the total compensation package, including protection from dilution of your options, after you have thoughtfully considered the delusional aspects of signing on with a new company making grand claims.

The company I work for...

[kmmatthews]

still does. It's a ... convulted calculation, but you end up getting between 2-4x your monthly salary in stock at the end of the year. So if you make 5k a month, you can end up getting between 10 and 20k in stock; which you can sell immediately if you so desire. (They also have an end of year cash bonus equal to 1/2 of one months salary.)

Here's a note to other companies: this stock bonus ploy keeps me working for them when I might otherwise seek other employment. Pay/treat your good people nicely, and they'll respond in kind. Treat your employees like crap, and they'll respond in kind.

(ok, I'm really tired.. err, that's my excuse.)

Re:My company still hands them out like TP

[Antique Geekmeister]

Bingo. STock options were a way to pay people in the future of the company: they were used to give wildly underpaid employees, and investors, something on paper. Unfortunately, they're only valuable when the company's stock value goes up.

Now look very carefully. The only people who can sell them when the company makes its IPO are VP's. The employees are prevented by lockout periods from selling them when they are most valuable, right after the IPO or when they have some value left, right before the company tanks. VP's, however, get to sell them with the insider knowledge that they're not supposed to use, and they get nice golden parachutes when the company tanks. In a few cases, the employees can get more value than the many man-hours they invested and the pay they didn't get to take the stock options instead. And in a few cases, people win big lottery options that are worth more than all the lottery tickets they personally bought.

But they're not a good investment idea for most of us who do the real work. In most cases, they're a place to hide money to pay off the highest level staff, in a way that the company doesn't have to show on their books and will never have to redeem except for those high level staff who can sell them when they have value.

Re:The company I work for...

[Antique Geekmeister]

No. Stock options are not stock. The company does not pay dividends, you cannot sell them at whim, and they're worth exactly nothing if the company value does not go up. It actually makes it advantageous for the company to keep the stock value low, bump it high with some faked up announcement so the the VP's can sell their options at a fraudulent value quickly before the employees can blink, then step out or even quit before the fraud comes home. Why do you think it's called "pump and dump"?

Cash, baby - that's where it is at.

[NotQuiteReal]

I too am doing well as an independent contractor.

I am a three-time loser in the stock-option arena; 1) early 80's "100,000 shares - at $10/share that's a million". Worthless. 2) Mid-late 80s - "hey you have 5% of the company stock!". Worthless. 3) "Recent" dot-bomb. 'nuff said. Worthless.

You are far better off negotiaing a fair wage, fully funding your IRA, 401K, SEP IRA, what-have-you. Hey, take a flyer once-in-a-while, if you can afford it, but remeber, it's like playing the lottery - "you can't lose if you don't play".

Paying quarterly taxes is a bitch, getting big fat gross checks is what everyone should get to realize how much we pay in taxes, if you pay your taxes without withholding. If you make even a little bit [I pay over 50K USD year in taxes and don't feel "rich", don't drive a BMW, don't vacation in exotic places...] you see how much "the rich" pay in taxes.

Re:Please..

[coreman]

Well, the reason we're worth 50-60% of where we were 5 years ago is BECAUSE there are people out of work that would be willing to take a deeper cut in pay to be employed. This is certainly true in the northeast. And let's not talk about the lack of raises. The market has slumped and is very flat and a lot of good people are still unemployed or under-employed. It's gone from a seller's market in the 90s to a buyers market now, and there isn't a lot of buying going on.

Re:Freelance

[LuxFX]

I went freelance and am doing better than I ever did at the companies and corporations I worked for in the past.

Ditto that. I kept losing every job I got because of incompetent management leading to the company going under. I finally started my own company, and make about twice what I did before, and I get to work from home where my wife and brand new baby boy are. Plus, I've kept at it about three times as long as my longest stint at employment.

I don't see why my success should depend so much on other people's abilities and decisions. That's the problem with stock options. Sure, they're nice if you work for M$ or Google or Amazon before their IPO, but 99.9% of the time taking stock options is like placing a bet on the competence of your management.

Think about it. Can you even wrap your brain around the concepts of "competence" and "management" at the same time? I didn't think so. Forget about stock options. Find a company with better incentives.

Re:One DNF in hand is better than two pre-ordered

[smallpaul]

My preferred compensation is profit-based bonus. So if a company is making profit, employees share the pie, it's like dividends to shareholders except you hold your "shares" in the form of employment/position.

There are many quickly growing companies that do not have profit because management has decided to reinvest it.

Re:Stock Options Can be a Good Thing

[Christopher Thomas]

And now, I realize just how pathetically little, a million dollars really is. I look at movies from the 1970's where the plot was someone pulling off a robbery, or murder, for like $10,000. Dude, $1 million won't change your life in a way that's measurable 5 years out.

$1 million put into safe but low-yield investments would give me my current pittance of an income _forever_, _after_ inflation. $2 million would let me retire in modest comfort.

So, while $1M won't make you _rich_, it's still a very respectable amount.

Re:Please..

[servognome]

Well, the reason we're worth 50-60% of where we were 5 years ago is BECAUSE there are people out of work that would be willing to take a deeper cut in pay to be employed
Though you probably were not worth what you got 5 years ago due to labor shortage. High pay in the 90's led to everybody getting an IT degree/certification to cash in, which has caused excess labor now. Don't expect things to be as rosy as they were in the boom times, but it should get better than it is now.

Re:Yes and no...

[Antique Geekmeister]

Now, folks, notice the shell game this fellow just did. He succeeded in conflating ESPP and "employee pay over the minimum to get you is wasted" with stock options. These are each very, very distinct issues. The conflation and shell game are part and parcel of the stock sales game. The .sig is also nice hook to try and rope in some extra business from slashdotters who are convinced of the Stock options at the typical employee level are betting your man-hours, your hard-work and time, against the increasing stock value of the company. They're also where companies hide money for executives: there's a fascinating set of income tax and reporting requirement laws that take effect when a CEO or other corporate officer makes over $1 million/year, that are frequently evaded by paying exceptional amounts of stock options that need not be reported to the stock holders. It's a nasty world out there. Watch your backs.

Re:I think the problem is...

[angle_slam]

Self-insurance is a very bad idea. As others mentioned, just get insurance with a high deductible. The costs are about the same. And you never know when unexpected medical charges will come up. (e.g., my wife recently found out she had breast cancer. $70k in doctor/hospital fees later, she is cancer-free. But I shudder to think what would have happened to us financially had we been "self-insured" (which is actually just not insured.))

Re:One DNF in hand is better than two pre-ordered

[EnderWiggnz]

i dunno... i've had it work for me, but i did the most important thing.

i sold, and didnt get greedy.

but the key is - you must SELL, and then, place it in a nice conservative investment vehicle like a house.

i've heard too many horror stories of people who were up 300x, and didnt sell. people who could have *retired comfortably*, yet didnt sell, and lost just about everything in the crash.

i'm a big fan of options, and the stock market in general, but you absolutely, positively must know when to take money off the table, and into your pocket.

Re:One DNF in hand is better than two pre-ordered

[operagost]

This leads you to accumulate wealth rather than piss it away on the latest doodad or geegaw.

I am more than mature enough at 31 years of age to manage my own funds. I don't need my employer to lock them away to keep them from burning a hole in my pocket. I prefer employers who match investments in a retirement fund.

Re:Please..

[theLOUDroom]

On the contrary, they have to pay you exactly what you are worth, you are just worth a lot less than you think you are... Your worth (at least in $ terms) is defined by the market.

Not so. That's a really oversimplified view of economics.

Let's say an engineer can generate $100k/year worth of profit for me, after overhead. Let's say there are lots of engineers out there willing to work for $10k/year. How much are those people worth?
See the thing most economics classes neglect to point out is that by manipulating your costs and benfits you can pretty much get any answer you want while applying an oversimplified model to a complex situation.

Your comment reminds me of a joke:
Two economists are waliing down the street and one sees a $20 bill lying on the ground. He goes to pick it up and the other one calls out:
"Wait, don't bother!"
"Why not?"
"Well if it was worth pikcing up someone would have already done it."

See my point? In the REAL WORLD it IS possible to buy something for less than its worth.
A particular oversimplified view of the world might say that no one would ever leave a $20 bill on the ground unless it wasn't "worth" picking up, but that's an obviously silly assertion. In the real world things that are not economically "optimal" happen every day.

For a final example of the sillyness of your statement consider the worth of someone who is unemployed. Are they really worth $0/day?
Or, is unemployment itself an example of "market failure"?
See that's the funny thing here:
The same theories that say that a person is worth what the market is willing to pay, also predict ZERO unemployment.

I'm not claiming the whole science of economics is BS, BTW. The points I'm making are (IMO) why there is an actual division between microeconomics and macroeconomics.
When you look at things on a large scale, it becomes painfully obvious that none of the models being used are actually "true". They're more like trying to fit a polynomial to a set of datapoints.

Re:Cash, baby - that's where it is at.

[SubliminalLove]

This is slightly off topic, but what the hey, karma is for burning.

I'm a college undergraduate with about $16,000 a year disposable income, including what I pay for my education. And I do feel rich. I just got back from three weeks in Kyoto, and I'm spending December in Germany. I love what I study (computer science and the languages of the above-mentioned nations), I have friends all over the planet, and the work that I do (programming, and webpage translation for Japanese companies) is rewarding to me.

If I can feel rich, as well as travel to exotic places, living below the poverty line, and you can't feel the same way about your own life when you're clearly making a couple hundred k, I really think you might take another look at your priorities. Because I'll probably never make even a small fraction of your income, but I already feel wealthy compared to you.

~Me

Re:I think the problem is...

[lsmeg]

I'd have to agree here. The reason this setup makes money for insurance companies is that they have millions in the bank and can afford to pay for a catastrophe, knowing that it pays out in the long run. But if you don't have lots and lots of money to begin with, that catastrophe can bankrupt you.

Most people can afford to put away money for the occasional accident, broken bone, minor surgery, etc. But something major can really mess things up, especially if the catastrophe happens earlier in life before you have saved up. It sucks pissing away all that money to the insurance companies (and it's horrible when they try to weasle their way out of paying), but I think it's worth it in the end.

Re:Please..

[Lord_Dweomer]

"On the contrary, they have to pay you exactly what you are worth"

BZZZT! Wrong answer.

They pay you exactly what they THINK you are worth. I'm not saying inflate your resume artificially, but certainlly fluff it up, work any connections you have, etc.

I'm a good example of this. I have managed to stack my resume through college, plus I am creative enough to talk it up, and I interview extremely well. I have managed to not only get job offers, but have asked for more money and been approved.

I say this not to brag, but to prove that its all part of the game. You need to increase your perceived value by hook or by crook (well, maybe not by crook). Get creative people, start listing some of your obscure hobbies on your resume. Do SOMETHING to make yourself stand out as an individual and as someone who brings something unique to the table (possibly more than one unique thing). Hell, I've been teaching myself Japanese for the past 3 years just to understand anime a bit better, but when people read that I've been self-teaching myself Japanese, they think "hmmm, very interesting and unique, and it shows that he's a self-starter who's fully willing to dive into tough situations".

BAM!!! That INSTANTLY puts me ahead of somebody who neglected to list any hobbies. Remember, anything you hand them or say to them or w/e at an interview or before an interview (hell, anything before you get hired) has an affect on if they decide to hire you. If you want to be competitive, you need to learn to friggin schmooze like Leisure Suit Larry. Doesn't matter if you're not assertive, personable, etc. FAKE IT! And for those of you with any cash to spend, an improv acting class or two doesn't hurt things any.

This is scary for me because I look around and I see how many of you are much older than myself and do not have the common wisdom to start thinking outside the box. This is not a computer program, there are no rules (well, except the law...um...yeah.)

So I mean this post to kick you in the asses, but also to cheer you on.

There are people out there who are able to get hired for a prime position during a hiring freeze simply because they set themselves ahead of the pack. Make that effort, because most likely your peers won't, and that just makes your chances better.

Re:Cash, baby - that's where it is at.

[jrumney]

I pay over 50K USD year in taxes and don't feel "rich"

This is the mentality that causes CEOs to keep giving themselves pay rises. You've got a six figure salary which puts you at least in the top 5% of earners. You are rich, whether you feel it or not. Obviously money is not what makes you feel "rich", so stop trying to get more of it and look at other aspects of your life.

Re:One DNF in hand is better than two pre-ordered

[ThousandStars]

You're essentially getting paid in risk rather than money.

Exactly. The higher risk implies at a higher reward. During the dotcom boom, though, that risk seemed low.

Keep in mind as well, however, that stock options show up differently in accounting land than regular compensation. That's why so many small and not-so-small companies like stock options: those options don't come directly out of cash flow, and if that cash flow never quite materializes then the investors aren't out as much. And if the cash flow does materialize, then the employee makes a tremendous amount of money. Everyone wins. Or at least that's the theory.

Re:Depends on your needs and age

[mjpaci]

If you need money to live on, you shouldn't rely on the possibility of a cash bonus at the end of the year. A lot of companies have "guaranteed" bonuses of 5% or 10% of your salary. That is just another term for "deferred compensation" which helps the company because rather than paying that 5% or 10% to you over 12 months, they hold on to it and earn money on it and then give it to you. You are basically lending your company 5-10% of your salary interest free.

In the past few years bonuses at my company have sucked. 5 years ago a lot of the IT people (desktop support) were getting $15,000 bonuses on salaries of $40,000. Not bad for a 23 year-old until that bonus goes to $1000 a couple of years later.

I've learned to live on what I make and take any cash bonus as a gift and not to rely on it.

One thing options do is keep talent at companies. If you receive options that don't vest for 2 years and during that time the stock rises a lot, the opportunity cost of your leaving that company is pretty high.

Just some thoughts.

Mike

Re:Dot Bust horror story

[Anonymous Coward]

Either the US tax system is more screwed than I imagined, or he left it too long between exercising his options and selling the shares. The whole point of options is to exercise and then sell almost immediately, minimizing the chance that the stock will tank in the intervening period between those two actions. This article [investorguide.com] gives more info on the two basic types of stock options, apparently from a US point-of-view. It strikes me that either he was badly advised regarding handling the one year lock-in period (which is common practice for insiders - normally, you'd only exercise after the lock-in period) or he ignored the advice which was given.

Re:I think the problem is...

[captaincucumber]

Amen.

People should think of it this way:

when you get an oil change, do you show your car insurance card so that you'll only have to pay a $10 co-pay?

When you fail to get proper maintenace on your car and have to have the break rotors replaced, does your car insurance kick in and cover that?

Car insurance would cost a fortune if it covered all this stuff. So is it any surprise that health insurance costs are out of control?