Compensation experts say the Nasdaq's tumble in the past few weeks is casting a shadow over the liberal use of stock options--the traditional carrots that cash-strapped high-tech firms and start-ups dangle in front of job candidates.
Experts say that tech companies may have to scale back generous option grants in favor of larger salaries and annual cash bonuses that aren't directly tied to the company's stock price.
"Cash is king," said James McElligott Jr., a compensation expert and partner at Richmond, Va.-based law firm McGuire Woods Battle & Boothe. "That has generally been true forever with executives at established companies. With the recent stock market swings, it's something that tech companies are being forced to realize."
The tech-heavy Nasdaq is down more than 25 percent from its peak on March 10. Many individual tech stocks, including recent Wall Street darlings such as Ariba, Commerce One and Red Hat, are down more than 50 percent in just the past month.
Although the damage in the markets has been most acute in the past few weeks, many stocks have been under pressure since last year. Roughly 60 percent of all companies listed on the New York Stock Exchange and the Nasdaq Stock Market ended 1999 lower than they started the year, according to Ed Archer, vice president of New York-based compensation consulting firm Pearl Meyer & Partners. The figure does not include companies that went public during 1999.
The phenomenon has caused job seekers to look at options with a jaundiced eye and to demand bigger salaries, Archer said. The trend is particularly true at start-ups that haven't gone public, where the risk lies not only in stock price appreciation but in whether the company can go public in a bear market at all.
"We hear about all these wonderful IPOs that go through the roof. But for every one that goes through the roof, 10 fail," Archer said.
"They've been dangling the options out there and saying, 'You want a chance to hit a home run, or do you want to stay at the old-line company and get cash?'" Archer said of the start-ups. "They can't be quite so blatant about it anymore."
Other experts say the tumultuous market presents a grand opportunity for "old economy" companies, which have watched employees defect to start-ups lured by stock options. Numerous blue chip companies, including IBM, are bolstering "alumni" programs aimed at recapturing good workers who jumped ship, only to become disenchanted with start-up culture and compensation.
Typically, stock options have a strike price that is based on the day the employee joins a company, and they vest over a period of several years. For example, an employee might receive 3,000 shares with a strike price of $60 that vest in equal amounts over three years. After one year on the job, this employee would be allowed to buy 1,000 shares at $60 per share and immediately sell the shares at a higher price.
In some companies the strike price could be negotiable, and in others the strike price may be set above the price on the employee's first day.
The risk of stock options over more secure cash incentives--awarded if individual workers reach productivity or sales targets--was a major factor in the job search of Shakeel Munjee, senior programmer at an established Los Angeles firm. With his wife a full-time student, he decided against offers from risky start-ups.
"Working for a start-up can be great if the company has a solid business model because you are often exposed to the latest technology and can play several roles," Munjee said. "However, there is a lot to be said about working for a large corporation with deep pockets, which can provide you with a stable long-time career."
Lisa Rose of Oakland, Calif., echoed the sentiments of many job seekers: She wants stock options but doesn't want to depend on them. She called them "gravy."
"I'm looking for the right cultural fit, reasonable time commitment per week, and lastly, a reasonable and livable compensation package," said Rose, who is searching for a job in creative services and program management in the San Francisco Bay Area.
Minimizing the importance of stock options in the overall compensation plan may become the norm for rank-and-file tech workers, but it is more controversial for executives, whose annual incomes have become bloated with options.
Many executives saw their portfolios inflate as the overall market soared in the mid- to late-1990s. Between 1992 and 1998, the compensation of the average CEO almost doubled, to $8.4 million, according to a survey of Fortune 200 companies by Pearl Meyer & Partners. And $4.6 million of that average--more than half of the executive's total compensation--was through options grants.
Critics contend that executives profit not because of their performance but because of the buoyancy of the overall market. To closer correlate an executive's compensation with his performance, many companies are drifting from options to cash bonuses tied to individual performance standards.
Others are considering indexed options, in which a company's performance is compared with others in the same industry, while some want to reprice the options lower to keep valuable executives during a market correction. (Because of complicated accounting rules, companies don't find those alternatives as attractive as granting standard stock options, which have less of an effect on earnings.)
The gravest danger in stock options' dissolving value isn't that CEOs are taking home fewer millions, said Brent Longnecker, executive vice president for Santa Ana, Calif.-based Resources Connection.
He has seen worthless options sap productivity and morale on a corporate scale. He's optimistic about the long-term stock market rebound potential, but he's worried that many employees and companies will lose enthusiasm in the midst of market mayhem.
"The allure of this stock price appreciation is dangerous," Longnecker said. "If everyone gets into the perception that there's going to be a giant uptick and there's not, morale will crater...I've seen employees at some clients actually take credit card loans because they can't cover living expenses."