CEO's Notebook: Stock Options Equity

Tips and resources on offering stock options, sharing equity, teaching employees about their stock, and discouraging them from selling stock to start their own businesses.

Tweet

Hands On

We're thinking of offering stock options. Any tips?

Make sure employees understand what they're getting into. When a number of employees at BroadBand Technologies, in Research Triangle Park, N.C., exercised their stock options, they did so without realizing that they had to immediately pay taxes even though they didn't get any cash from the transaction. (See " Know Your Options" for an explanation of how and when such tax liabilities can occur.) "We helped them out with loans," says chairman of the board Salim Bhatia.

Now the publicly traded telecommunications-equipment company, which had $23 million in 1996 sales, educates workers about stock options.

Corey Rosen, executive director at the National Center for Employee Ownership, in Oakland, Calif., suggests reminding employees that a stock-option grant rarely replaces more traditional benefits such as a pension plan and therefore should be viewed as a bonus--one that in some cases may never be worth a dime.

"It really depends on whether or not the company is profitable or, in particular, if the company goes public or is acquired," says Cynthia Clarke, a partner with Boston-based law firm Sullivan & Worcester LLP.

Be careful about what you say. "A company can't be in the position of giving tax advice to employees," says Steve Burt, an audit partner in the Austin office of the accounting firm Coopers & Lybrand LLP.

He recommends that you encourage workers to seek outside counsel and that you never talk an employee out of exercising options or selling stock. If you do, an employee might have grounds for a lawsuit if, say, the company goes out of business before that employee exercises those options or sells the shares. Though Clarke thinks the chances of such a suit are slim, she advises that "you'd be wise to look out for what you're saying whenever you're talking to someone about buying or selling stock."

Make the link to performance as clear as possible. At BroadBand Technologies, Bhatia didn't want hotshot techies--many of whom have come to expect stock options--to take the company's options for granted. So BroadBand's options are awarded in return for meeting annual corporate goals. If the company meets yearly targets, employees are reviewed and are granted options for both their team and their individual performance.

"It's important that it doesn't become an entitlement," says Bhatia. "You have to communicate to people on an ongoing basis how their role affects the company." --Stephanie Gruner

In general, are there marketing advantages in sharing equity?
There can be. Ewing and Thomas, a 45-person physical-therapy business in New Port Richey, Fla., opted for an employee stock ownership plan in 1988 to simplify succession planning. The company plays up being 100% employee-owned on every piece of advertising--from appointment cards to a banner on the front of its building. Patients walk into the company's offices asking, "What does that mean?" according to vice-president Dee Thomas. "Of course, that gives us a wonderful opportunity to talk about what makes us different." Infinity Graphics, a $20-million printing company in Enfield, Conn., reports a similar marketing boon from employee ownership. "The ESOP is a tiebreaker," claims chief operating officer Clint Humphrey. "It pushes us over when someone is thinking of trying new suppliers." --Susan Greco

Where can I get more information about equity compensation?
Don't know the difference between an employee stock ownership plan and a stock-option plan? You're not alone. Confusion abounds about the ways that companies can offer equity to workers. You can increase your knowledge by visiting the Web sites of the National Center for Employee Ownership (NCEO), in Oakland, Calif., and the Foundation for Enterprise Development, in La Jolla, Calif. In the stock-option section of the NCEO site, you'll find an essay explaining the differences between an ESOP and options, "A Tale of Twin Acronyms: An Employee Stock Option Plan Is Not an ESOP." Both groups also offer helpful publications. NCEO, for example, publishes The Stock Options Book, edited by Scott S. Rodrick (510-272-9461; 1997; $25 for NCEO members, $35 for nonmembers). Good luck deciphering the chapter on valuing options, but the sections on private companies and on phantom stock should have plenty of appeal.

 1 | 2  NEXT 

Read more:

Sign-up for our Leadership and Managing Newsletter

Email Address: