Consider Your Options

By Dan Kadlec

Millions of stock options granted to rank-and-file employees in the late 1990s are set to expire worthless in the next few years--a sobering reminder that when it comes to your compensation, there is no substitute for cash, and when it comes to your long-term financial security, there are no can't-miss lottery tickets.

The total lost value by 2010 will be in the hundreds of billions of dollars, according to estimates from the National Center for Employee Ownership (NCEO). That stunning assessment helps quantify the dashed hopes of countless working stiffs who had been banking on options to help with goals like paying for the kids' college tuition and their own early retirement. In some cases, their options came in lieu of tangible rewards like a decent raise, profit-sharing or cash.

The harsh lesson, says Corey Rosen, executive director of the NCEO, "is to look at stock options differently going forward. You need to understand just how likely it is that these things will pay off." The answer for many right now: not very.

Here's the problem: stock options typically are granted on an annual basis, and with each set, you must use them or lose them within 10 years. They have cash-out value only when the stock has risen above the "strike price" (usually the price on the day of the grant) and after a typical vesting period of three or four years.

Historically, this has been a slam dunk. Option grants to top execs in the early and mid-'90s made them wealthy when the markets caught fire later that decade. In part to ward off criticism and in part because options were seen as free money then, many CEOs shared the bounty with the rank and file. This was most often true in cash-strapped start-ups in Silicon Valley. But the equity-for-all ethos spread. Fewer than a million people held options at the start of the '90s, but the number swelled to 12 million in 2001. It stands at 9 million, and shrinking, today.

As it happens, the broadest distributions occurred from 1998 to 2001, a period marked by nosebleed stock valuations. The 10-year expiration on those grants is near, and the NASDAQ is still at just half its peak level, while the broader Standard & Poor's 500 has barely gotten back to even. Grants made in 2000 alone represent lost value of $150 billion, with virtually no chance of recovery, says Ira Kay, an executive pay consultant at Watson Wyatt.

These losses are tough on all recipients, but the rank and file suffers most. Many top execs have been bailed out with supplemental grants and so-called reloads. What may be most interesting about this saga, though, is that after stock prices tumbled from 2000 to 2002 and another bull market was calving, broad-based stock-option plans began to fade. Some 8 million workers received grants in 2000; the number dropped to 3 million by last year, Kay says. The total value of grants has slipped by a third, says the NCEO.

Pay consultants say companies have returned to the old days of granting options, or restricted stock, only to big shots and stars. The NCEO estimates that the number of companies with broad-based plans has dropped to 3,000, from a peak of 4,000 a few years ago. As a result, says Kay, "morale problems are stewing." He warns that line workers understand the value of options when they are granted while the market is low. "They'll see this as a pay cut," he says, and it will infuriate them when CEOs start ringing the register again.

The equity culture is far from dead at privately held companies, where broad-based stock-ownership plans (ESOPs) are still popular and well funded. If you're changing jobs, keep that in mind. At public companies, meanwhile, you can still command options or restricted shares if you are a top performer. "But most people should focus on their benefits, like a cash bonus, a raise and the 401(k) match," says David Broman, CEO of pay consultant Syzygy. "Companies are in the driver's seat."

Employee stock-purchase plans (ESPPs) are also thriving, and those cut out of options plans should consider agitating for an ESPP if their firm doesn't have one. An ESPP typically allows you to buy stock commission-free at a 5% discount from market.

If nothing else, says Kay, take solace in companies' willingness to expand their work-life-balance benefits, which is the newest thing in keeping an aging workforce happy. Unlike stock options, benefits such as flextime, telecommuting and concierge services are a sure thing.

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