With stock options winding up in the hands of people who know little about the basics of investing, we thought some plain-spoken advice may be in order. For example, what criteria should employees consider when evaluating the significance of a financial institution's options program?
To help us provide an answer, we turned to two experts: Ryan Weeden, the project director in broad-based stock options for the National Center for Employee Ownership, Oakland, Calif.; and Howard Golden, a principal with William M. Mercer Inc., a New York-based human resources consulting company.
Here are several points worth considering:
The stock price's expected gain
All the options in the world amount to a hill of beans-or less-if the underlying stock doesn't someday move above the exercise price. "Option holders are future shareholders," says Mr. Weeden, adding that employees need to do a little old-fashioned fundamental research on the earnings prospects of their company.
The regularity and size of the offering
Obviously, options on 200 shares are better than those on 100. But some companies are making option grants an annual or semiannual gift, while others refrain from such a commitment. Find out what your company is doing.
The vesting period
Many companies won't let you keep all the gains related to the exercise of options and the resulting sale of stock unless you have worked there for a certain length of time. With "gradual vesting," a company might allow you to vest 20% each year for five years. This is the case at the Travelers Group. Other companies use "cliff vesting," which allows for 100% vesting but only after a set number of years.
Finally, R. David Simmons, a principal at Towers Perrin, cautions that stock options should be viewed in the context of a company's overall compensation package. "Are these options coming in addition to a good salary or in lieu of a good salary?" he asks.
If the answer is "in lieu of," then the employee needs to weigh the expected future gains of his or her options package against the cost of forfeiting a better salary and bonus somewhere else.