Stock Option Moving Sale!

Everyone loves when a business or a family down the street has a moving sale. You have options to buy stuff at a discount even if you might not need it. Heck, sometimes you purchase something even if it might be out of fashion by the time you finally get around to using it. You convince yourself that the discount justifies buying things that you might even have owned and found not to work in the past. Maybe this time that type of skirt will look good on you. Maybe this time you will lose the weight and be able to wear that electric blue tuxedo to next year’s holiday party. When looking at the cheap prices, your “super-shopper” mind only sees the upside.

Over decade and a half dealing with them, I have come to view stock options like items at a moving sale. When the stock market is moving up everyone sees a bargain. Stock options appear to be an easy way to fill a hole in compensation levels. Grant options when the stock price is going up and soon they will be worth even more. What are you really buying? 

I have seen more and more companies rolling out stock options since the crash of the market in 2008.  As the market has started turning around, many companies have been working feverishly to get stock options granted “before it’s too late”. There are, of course, a few problems with this thought process.

1. We are generally pretty terrible at knowing when the market has started to go up…or down.
2. More than ever, stock prices (including yours) are moving on meta-data, not your individual performance.
3. The basic paradigm of employee stock option value was built during the Golden Decade of 1988-1999.

http://www.thumbcharts.com/1319/dow-jones-industrial-average-since-1913

Think about other clearance sales you have attended.  You get the deals at the end, but the chance of finding what you truly want, or more importantly need, can be very slim. The people who shop in the first couple of days are usually the only ones who get what their imaginations had envisioned when they heard about the upcoming sale. The late shoppers get home with a big bag of question marks. Damaged items. Wrong sizes. Or, colors that can only be worn under something black. I’m sure you know what I mean.

This time the big stock options moving sale started in June 2009. That’s when the stock market started going back up. Given the stock markets recent history of 3 year (or less) up and down cycles, stock options granted today may likely become fully vested well into a future down market. In other words, your options may be completely out of style by the time you planned for them to fit you.

All is not lost.  Before you go on a stock option shopping spree read my upcoming posting on March 8, 2011 titled “What Do You Do if You Don’t Like Your (Stock) Options”. I discuss how other equity instruments can be used to balance or replace stock options in the new world of share-based compensation. Until then shop carefully!

Dan Walter is based in San Francisco, CA and is the President and CEO of Performensation an independent compensation consulting firm focused on the needs of companies not in the Fortune 1000. Dan’s unique perspective and expertise includes equity compensation, executive programs, performance-based pay and talent management issues, Dan is on the board of the National Center for Employee Ownership, helps create ShareComp, a virtual conference addressing equity compensation and founded Equity Compensation Experts a free networking group with more than 1,100 members. Dan is also in high demand as dynamic and humorous speaker. Connect with him on LinkedIn or follow him on Twitter @performensation.

Comments

[E James (Jim) Brennan]

Thanks for the perspective, Dan. Do you also see Restricted Stock Awards continuing to displace traditional Stock Options in the near future? At least in terms of the current payoff values (perhttp://www.erieri.com/index.cfm?FuseAction=NewsRoom.Dsp_Release&PressReleaseID=2179), they seem to be the at-risk component rebounding fastest for now. So many of these "trends" are only clear after they have passed and when their utility has ended.

[Dan Walter]

@James
I personally feel the Restricted Stock revolution is coming to a natural end. We will continue to see growth in these "full-value" awards, but it will slow until the market begins to fall again.

The one exception to this is performance-based units and related instruments. Read my post on March 8 for more information on this and other alternatives.

[Laura Schroeder]

I think we should all take a moment of silence to ponder #3.

[Dan Walter]

@Laura,

This graphic makes it pretty clear doesn't it? On the grand scheme it was difficult to lose on options during that period. So much so, that it lead to the reflex reaction of repricing for the few who did lose.

In a volatile market options become far riskier. Perhaps once again more of an incentive and less of a augmented base pay item.