Some corporations have in recent years departed from the practice of availing their employees with stock options, says Jeremy Goldstein, a partner at Jeremy L. Goldstein & Associates LLC., a firm based in New York. Besides economic reasons, the obstacles that led to the employers taking this direction included the fact that the values of stock might fluctuate downwards making it difficult for the employees to get these options. Besides, employees are cautious about stocks because they know the option is prone to economic downturns which might make a choice not viable. Thirdly, workers prefer the higher salaries they would get without the stock options.
On the other hand, stock options come with several advantages compared to the alternatives of higher pay, more comprehensive insurance plans ad equities. One such vantage point of stock options is that it is quite simple to understand and most employees will grasp the concept quickly and see the benefits thereof. Additionally, because a staff’s income will only rise when the share value of the corporation increases, the staff are forced to get innovative and work harder to improve the company’s performance. At the same time, adds Goldstein, who is also a business lawyer, that employers can adopt a type of stock barrier he terms as ‘knockout,’ which means that the staff members will lose the stock option when the share value falls below a certain limit for a particular prescribed period.
There is often a confining legal framework in Internal Revenue Service Rules, which limit corporations from providing their staff with equities. It leaves the firms with few options when it comes to especially rewarding their top executives. The laws make it difficult by ensuring that the business attracts more penalties when it provides shares instead of options.
Goldstein asserts that this alternative not only reduces the amount of money spent on compensations annually but also motivates the employees to maintain a certain level of stock value for their company.
A founder at the Jeremy l. Goldstein & Associates LLC, Goldstein has authored many articles on corporate affairs like the Shareholder Activism and Executive Compensation which got published on Harvard Law School Forum on Corporate Governance and Financial Regulation.
Follow Jeremy Goldstein on twitter.