Worker stock options can pay off big, or not at all

Staying Ahead

September 26, 1999|By Jane Bryant Quinn | Jane Bryant Quinn,Washington Post Writers Group

TRADITIONALLY, your pay has depended on real things: your line of work, seniority, performance, expertise. But not anymore -- at least, not in the white-collar world.

Nowadays, compensation feels more like a lottery. You might, or might not, luck into a job that gives stock options. The options might, or might not, pay off.

Employees with traditional pay get modest raises. The consulting firm William M. Mercer thinks that average salaries will rise by around 4 percent next year.

Employees with stock options might luck into giant paychecks. Of two people doing exactly the same job, at two different companies, one might get average pay while the other gets rich.

A recent Mercer survey of 350 leading midsize and large companies found that 17 percent grant stock options to all employees. Five years ago, only executives could get them, says Mercer principal Steven Gross.

Gross thinks the trend will continue. "Companies are using stock options as currency," he says. With a good options package, workers -- especially young ones -- may be willing to work for lower pay.

An option gives you the right to buy a certain number of company shares, at some point in the future, for the price of the shares on the day the option grant was made. Say you receive 200 options on a $20 stock. The stock goes to $50, and you "exercise" the option (meaning that you cash it in). You've made $30 a share, for a $6,000 profit. That profit is generally taxed as ordinary income, rather than long-term capital gains. And there's no deferral. You have to pay in the current year.

It usually takes three to five years for your options to "vest" (meaning that they're definitely yours). They generally have to be exercised within 10 years from the date of the grant.

If the stock price goes down instead of up, your options normally expire worthless. So you're taking a risk.

In fact, owning options is turning employees into worried stock-market timers. If the stock price goes up, should you exercise your options now? Or should you wait, hoping the price will rise further? If you wait and it rises, you'll be thrilled. But if it declines, you'll be miserable. You may have to exercise the options at a lower price.

Employees with good luck will get out at a higher price, giving them much more money to retire on. Employees with poor luck will exercise at a lower price, and retire with less.

You also have to keep track of your options, so you don't miss the expiration date. Only 76 percent of the companies that grant options notify employees when their options are about to expire, says Susan Lowry, of PricewaterhouseCoopers (PwC). If you miss the date, you get no money -- even if you could have cashed in at a terrific profit.

In the PwC survey, 38 percent of the companies said employees had allowed profitable options to expire -- presumably unintentionally. As a result, they lost money they should have had. That's not the way compensation or pensions are supposed to work.

"Companies are not doing a great job of communicating and educating option participants," Lowry says. They give you an explanation upfront, but only 30 percent provide educational materials on an ongoing basis.

Of the companies that grant options to all employees, nearly two-thirds are in high-tech businesses, Lowry says. Recently, more traditional companies have gotten into the game, to attract good employees.

Top executives often get new option grants every year. Lower-level employees might get them every two or three years.

Some companies are including a noncompete clause, even for lower-ranked workers. If you jump to a competitor, you typically forfeit the vested options that you haven't exercised. In a few cases, defecting employees have to pay back the gains from options they've already cashed in, Lowry says.

If you switch to a different industry, you should be able to keep all your vested options.

When you quit or retire, you usually have to exercise your options within three months. A few progressive companies let you pick any date over the options' remaining term.

If you don't get options, the compensation lottery might bring you a bonus. Of nearly 2,000 midsize and large companies surveyed by Mercer, half have increased the number of employees eligible for performance incentives.

But don't build bonuses into your permanent budget. Bonuses fade when profits do.

Jane Bryant Quinn is one of the nation's best-known syndicated personal finance columnists.

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