Many business corporations have of late been eliminating the advantage they give to their employees to buy their stock at discounted prices, commonly known as stock options. The main reason being floated around by these corporations and is that they are looking into ways of saving more money. However, is this really the reason? Let us look at some of the reasons explained by Jeremy Goldstein, that normally not known to people which actually contribute to this measure being taken.
At the top of the list is to avoid the risk of option overhanging. This happens when the stock value drops by huge margin making it hard for employees to buy the stock at their discounted price. Second, employees too are starting to reconsider the value that options add to their net worth. Employees understand that in case of a financial crisis in their corporations their options will lose value. Therefore it is not a sure investment. It can still backfire on you. Finally, some employees consider this as a financial burden. Some feel it is better to have the full salary without deductions for options being made.
Even as this happens there are advantages that are related to the stock options. One, stock options offers are of equivalent value to all employees. This means no employee is disadvantaged in the plan. Secondly, stock options have the capability of inflating employees’ earnings. Being aware that the more financial success a company encounters translate to more earnings, employees will be motivated to push the business into further growth. Thirdly, some laws governing the conduct of business organizations stipulate that they should offer options instead of shares. Failure do this will result in a bigger tax for the affected corporation. Therefore for any company to enjoy these benefits it must adopt a strategy that ensures a balance between the advantages and disadvantages.
One strategy that strikes this balance is the “knockout” strategy. This strategy works by deeming the options null and void if the share value falls below a certain amount. With knockout options, corporations can avoid overhanging non-employee investors. This eliminates fear from stockholders that their share ownership will be reduced.
Jeremy Goldstein is managing partner with Jeremy L. Goldstein & Associates LLC. It is based in New York. His law firm advises business organizations on matters of compensation corporate governance. Jeremy Goldstein main area of focus is on matters of transformative corporate issues.
Visit http://officialjeremygoldstein.com/ to learn more.