Cashing In?

BOSTON (06/12/2000) - The recent stock market drops have crushed many high-tech employees' dreams of cashing in on their stock options and retiring by 30.

However, an increasing number of established firms around the country are offering select valued employees stock options as a retention measure. Because most businesses are heavily dependent on IT, network professionals may begin to earn stock options as a way of keeping them from jumping ship.

"This is definitely going beyond Silicon Valley," says Ed Carberry, a project director with the National Center for Employee Ownership (NCEO), an Oakland, California, research and consultancy firm focusing on ways companies offer employees ownership stakes. "Outside of the high-tech industry, a growing number of public companies are offering these options."

Pepsi was the first firm outside of high-tech to offer options, Carberry reports. Other well-known businesses that offer stock options to most of their employees include Bank of America Corp., Bristol-Meyers Squibb, Gap Inc., Merck, Procter & Gamble Co., Starbucks Coffee Co. and Traveler's Group.

A recent study by NCEO found that up to 10 million employees in the U.S. now receive stock options - compared with only one million in 1990. And human resources consulting firm Watson Wyatt Worldwide found that 19 percent of employees at more than 1,300 companies it surveyed were eligible for stock options, up from 12 percent in 1998.

Network and telecom workers are certainly among the recipients, high-tech recruiters say. An informal poll among members of the Colorado Technical Recruiters Network (CTRN) found that more than half of the companies offered stock options to their staffs.

One e-commerce Web site developer at Merck who requested anonymity says she received stock options called Founder's Shares when she first started working at the company. She cashed them in after the five-year exercise period expired and was happy with the extra money.

Companies aren't concerned the value of the options they offer employees will drop due to market fluctuations, because it usually takes years for options to fully vest, says Peter Heyer, a spokesman for CTRN in Denver. They view options as a good way to attract and retain employees, especially technical workers.

Here's how stock options work: Employees are offered the option to buy a certain number of shares for a set amount - called the strike price - for a certain period of time. But stock options usually come with a vesting period, meaning you may not be able to cash in the full value of the options until you've worked at the company for a certain amount of time.

Say you have an option to buy 10,000 shares of stock for a US$5 strike price.

If it takes five years for your options to fully vest, and you have been at the firm three years, you could cash in 60 percent of your options at that time.

For example, if the stock is currently selling for $10 per share, you can exercise your options for 6,000 shares at $5 each. Then you can immediately sell them to net $5 per share, or $30,000. Or you could wait two more years and cash in all 10,000.

The key here is that the options only give you the right to buy stocks at a price set at the time they're offered - in the meantime, the company stock value may climb, or more disastrously, decline. And when you cash in those options, there are tax issues to contend with depending on how the IRS rates the stock option plan.

However, stock options give companies a lot of flexibility. Options can be awarded to select people in varying price ranges, while employee stock ownership plans require all employees to take part.

Employees at more established firms can rely more on stock options than those of smaller start-ups because these companies have already proven themselves on the stock market. This means there will probably not be as much volatility in prices as there is with new firms just entering into initial public offerings (IPO). Most experts recommend holding on to options for the long term to get the most out of them.

This differs from the practices of many start-ups that offer stock options before they are publicly traded so employees can cash in on a strong IPO. Given the recent performance of many high-tech stocks, the new Silicon Valley slang for stock options at a questionable firm is "sloptions."

"Every day there is a new stock-rich, cash-poor pre-IPO company waving thousands of stock options at good employees," says Tom Hogue, president of salarymaster.com, an advisory service for high-tech job candidates. "It makes it tough for more established companies to get noticed through all the noise."

But job seekers elsewhere shouldn't expect much from stock options and should instead view them as an added benefit.

No matter how options are used, market watchers agree that they have added a new wrinkle to employee compensation. "Companies will have to change their recruitment and compensation practices, and employees will have to be more shrewd about evaluating opportunities," Hogue says.

Ouellette is a freelance writer in Scarborough, Maine. He can be reached at tim_free@yahoo.com.

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