Death of the Employee Stock Option?

Death of the Employee Stock Option?

Many companies use ESOPs (Employee Stock Option Plans) to lure new talent. However as the first major vesting date appears on the horizon for the members of its ESOP, Google is anxious about a brain drain of the newly-rich. Together with backdating scandals that have hit companies like Apple and Monster, could this be the end of the employee stock option?

Employee Stock Option Death Noose

Why do companies push stock options on their recruits?

Refer-a-friend programs like SQLink's are good at bringing potential employees to a company's doorstep but in a competitive market like Silicon Valley or Israel, companies need more to pull those candidates through the door.

From a company's point of view, offering stock options is attractive because:

  • Stock options cost nothing to give, the cost is in managing the program itself
  • When employees feel they have a stake in ‘their' company, they make extra efforts
  • Employees are motivated to stay at least until their options vest, typically 3-5 years
  • When options do vest and employees react, the purchased options are a source of revenue for the company

From a new employee's point of view, receiving stock options is appealing because:

  • Optimistic new recruits, younger ones in particular, envision themselves down the road alongside history's stock option millionaires, especially if the stock is rising
  • The offer of options almost feels like a signing bonus
  • The options are typically not taxable until exercised.

Is offering a great salary good enough instead?

Sadly, no. As Nava Shalev explains (Hebrew), an employee whose only priority is making money will be easily tempted to leave once a higher bidder appears, and his employer will lose most of the return on his investment in that person.

What's a good company to do then?

Companies need to develop an employment brand, as Ms. Shalev suggests. For example, Google has already attained legendary status as an ideal place to work with its free gourmet cafeterias and far-reaching wifi-enabled, leather-seated transport system. A strong employment brand such as Google's attracts new employees and makes current employees reluctant to leave. If anything, this should allow Google to avoid the stock options brain drain trap that they fear.

What about smaller companies with lesser resources?

They still have many options to tempt you in creating an employment brand, requiring them to be more creative. Video game creator Red 5 Studios came up with an elaborate recruitment drive where they mailed 100 top developers a personalized package containing an iPod, and the package tied into a video game-like website that was created to sell the company to these candidates.

Conclusion

The employee stock option will continue to lose favor for now but will live on until another low-cost, high-impact recruitment lure becomes well known. Companies will need to exert more effort on building their employment brands, especially if they want to mitigate the effects of a backfiring employee stock option plan. The winners are the jobseekers, who will only benefit from companies' redoubled efforts to attract them.

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About the Author Jacob Share

Job Search Expert, Professional Blogger, Creative Thinker, Community Builder with a sense of humor. I like to help people.

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8 comments
Daily itzblogging big Links 2007-04-13 - itzblogging big - Serving the Unserved – Recruiters, Job Seekers, Quiet Working Professionals says

[…] JobMob: Death of the Employee Stock Option? “A practice made popular by Microsoft and Amazon, many companies use ESOPs (Employee Stock Option Plans) to lure new talent. However as the first major vesting date appears on the horizon for the members of its ESOP, Google is anxious about a brain drain of the newly-rich.” […]

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josh says

yeah, my company stopped giving out options to rank and file and then tried to convince us that stock options are passe and not a good/current incentive anymore in the IT marketplace (contrary to what most of us still dream).

The way I see it is that a) governments got greedy and wanted to tax the whole deal, b) companies don’t want the hassle of maintaining the program and dedicating some HR girls to answering the same ‘what if I …’ questions all day long.

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Top Posts for April 2007 » JobMob says

[…] 58 Reads – Death of the Employee Stock Option? […]

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Ilan says

Josh, you’re so cynical! Of course the government is going to tax it. Purchasing a stock for less than it’s market value is essentially the same as earning additional wages. Gonvernments tax bonuses, right?

Also, companies don’t want to deal with options anymore (at least not in the US) because now they need to put the options on the books as liabilities AND they need to periodically revise the value of those liabilities based on the stock’s worth – what a pain!

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jacob says

What a pain is right, but I have to imagine that professional accounting software takes out most of the sting of annual revisions.

The liabilities issue is a good point but why is it the case? Like inventory, purchased stock options bring in revenue. Unlike inventory, they don’t require an initial outlay (but perhaps this is a simplistic view). Since the company doesn’t spend any money by giving out stock options, why are they on the books as liabilities?

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Ilan says

OK guys, turns out I wasn’t totally right. Stock options now must go on the books as a COST, not a liability, because it’s essentially part of the employee’s salary. And its value on the books is the amount the stock was worth when it was granted to the employee. That cost is then recognized during the course of the time period the employee needs to work before they can option the stock.

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jacob says

Thanks for clearing that up, Ilan.

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Kate says

The death of stock options is/was a sign of how employees are losing all the benefits of their own expertise.

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