Stock options have become a lightning rod for discussion among investors in recent years as this type of compensation has been recognized as an expense on the corporate income statement. No longer could stock options be issued as quickly as the printing press could make them. Today, employee stock options are a tangible cost of recruiting and retaining the best talent.
Employers need to reflect on their hiring practices when debating the need for such compensation. Every share exercised by employees is an expense of the business, reducing its overall operating profit. Offering stock grants willy-nilly is definitely not the answer, but neither is avoiding the practice altogether. Providing a broad-based program for a majority of employees and not just upper management has been proven to dramatically increase both employee productivity and their overall happiness.
Stock options should not be considered mere bonuses, as they are so much more. A bonus produces a specified dollar amount for reaching productivity goals but nothing more. With options you provide much greater financial incentive. Sure, there is the potential to cash in shares as the vesting period expires, but their real value comes in the equity ownership they represent. An employee investing in company shares is making a commitment to the long-term corporate plan, no matter when he or she sells them. When options are granted, it's not just an extra paycheck for a job well done but an invitation to that employee to become a partner.
It's commonly thought that only publicly traded companies can issue stock options, but that is not the case. Private companies also issue them, though the way they are valued is different. While a public company uses the stock price at the close of trading on the day the options are granted, a private company needs to look at the price that the last amount of stock was issued for to determine the granting price. If this isn't possible, a business valuator should be hired to determine their grant value based on estimated business valuations.
Some private companies like to use profit-sharing plans in conjunction with or in place of stock options because it gives them a little more flexibility when dealing with financial difficulties. In any given year, if business is down, they can suspend payments if needed. On the other hand, once stock options have been granted, they have no control over when the options are exercised after the vesting period has passed.
As an employer your goal is to recruit and retain the best employees possible. Stock options, when used responsibly, can balance the interests of shareholders, management and employees.