According to Jeremy Goldstein, many companies are not issuing employees with stock options. A number of companies pursue this strategy with the objective of minimizing operational costs. Notably, firms stopped issuing stock options because of three major issues. The first major problem is that the stock value may drop considerably, challenging the staff to exercise their options. Companies that offer stock options are required to report the associated expenses. Additionally, stockholders can be faced with option overhang.
The second concern is that presently, many employees are wary of the compensation method. They understand that economic downturns regularly render options worthless. Thirdly, options generate significant accounting burdens. The associated costs may exceed the financial advantage of such derivatives. Employees do not always consider benefit of options as valuable as the big salaries.
Nevertheless, the compensation method has its advantages. It is still preferable as compared to better insurance coverage or additional wages. It is easier for employees to comprehend how stock options work. They offer equivalent value to the entire staff. Moreover, options enhance personal earning if a company’s share value rises. Employees will be motivated to redouble their efforts to satisfy the utility of existing customers, attract desirable customers and create innovative services.
Some Internal Revenue Service rules make it difficult for companies to offer employees with equities. Corporations may face greater tax burdens when they issue shares instead of options.
To this end, if a company opts to provide its staff with stock options, it can gain several benefits and avoid extra costs by adopting the correct strategy. A company must take the necessary measures to limit overhangs as well as initial and ongoing expenses. The best option is to use a Knockout strategy, a stock option that has the same limits and vesting requirements similar to their conventional counterparts. However, employees can lose them if the share values lowers beyond a specific amount.
About Jeremy Goldstein
He is a partner at a boutique law firm, Jeremy L. Goldstein & Associates LLC. The firm provides CEOs, management teams, corporations and compensation committees with insights on corporate governance and compensation. While offering his advice, Goldstein focuses on transformative corporate events along with sensitive issues.
Previously, Jeremy Goldstein rendered his services for Wachtell, Lipton, Rosen & Katz as a partner. In the last ten years, he has engaged in some of the largest corporate transactions such as the United Technologies’ acquisition of Goodrich. He holds a Juris Doctor from the New York University School of Law. He also holds a BA degree from the esteemed Cornell University.