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Stock options for laid-off employees?

Amazon.com is setting up a trust fund of $2.5 million worth of stock for laid-off employees, an unheard-of act.

As Amazon.com laid off about 1,300 of its staff Tuesday, the company gave out an unusual, golden handshake.

The Seattle-based company said it is setting up a trust fund of $2.5 million worth of stock for laid-off employees. The fund will hold the stock until mid-2003, when it will be sold and distributed to dismissed workers. The company did not disclose details about how it will dispense the proceeds or in what portions.

"The individual payouts will vary based on how well the stock does," Amazon spokesman Bill Curry said. "It's an opportunity for the 1,300 people affected to still share in the longer-term success of the company."

While granting stock options to new employees has become standard in the high-tech industry, giving departing employees a stock fund is an anomaly, compensation experts say. The act stands out not only more broadly among traditional businesses but also in an industry that has been hobbled by investor skepticism and is fighting to prove that its business models will pan out over time.

"Presumably the options held by the people being laid off are either underwater or have very little value," said Carl Schmitt, vice president of WestWard Pay Strategies, a San Francisco-based executive and stock compensation consulting firm.

"So this could be a way to give people an opportunity to realize some gains over a longer period of time that they wouldn?t otherwise be able to achieve."

Typically in a stock-option plan, employees have 90 days after termination to exercise their vested options. If the options are underwater--or trading at a price lower than the option price--it's unlikely that they would see daylight in a 90-day period, Schmitt said. By setting up a trust fund, the company may be creating an alternative mechanism for employees to receive stock gains.

Compensation executives said that high-tech companies occasionally make various allowances to stock-option packages after letting employees go, such as accelerating the vesting cycle or extending the period after termination in which the employee can buy exercised options. But setting up a trust fund was an unheard-of act.

Unlike what happens at other companies, the outstanding stock options held by Amazon employees affected by the layoffs will not automatically vest, Curry said.

That Amazon is issuing a fund to laid-off employees shows its belief in its long-term viability, pundits said.

"You couldn't buy better advertising for $2.5 million to say that there's still a belief in Amazon that their business model will work," said a source close to Amazon.

"It's also their way of saying thank you to the people who helped build the company. It's a good touch to a tough business decision," the source said. "If you give cash severance, and once it's spent, game over, the former employee's disinterested. By giving stock options, then you tether the former employee to the company in a relationship."

But the move may be costly to the company.

"The shares that are contributed will dilute those held by shareholders, and because it's set up for nonemployees, there's accounting charges," Schmitt said.

But the fund is a nominal amount, worth less than an estimated $2,000 per employee. Experts question the importance of such an act of good will.

"In some ways the hassle and mechanics involved in setting up and administering the fund may outweigh the benefits of what might seem a fairly nominal fund," Schmitt said.

News.com's Troy Wolverton contributed to this report.