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Employee stock options were once used to hire and retain key talent. With bearish stock markets, most of these options have gone underwater and have become worthless. Companies are reworking on their stock options to make them more attractive and retain key employees.
Key talent is necessary for the success of any company. Acquiring and retaining human capital is a mammoth task for the companies. Companies over a period of time have used various tools to retain the talented workforce. One of the most powerful and effective tools which has gained prominence in the last decade is the employee stock option. These have acted as laser guided cruise missiles to win the war against attrition. Salary was no longer relevant and the number of stock options an employee held became the talk of the town. Employees became millionaires overnight. In an era where the unemployment level was low and the talented employees were scarce, employees used the options as a bargaining tool to stay back. In US, according to National Center for Employee Ownership (NCEO) between 8 to 10 million employees in US participate in broad stock options representing several $100 mn in value. In 1999, more than 140,000 high-tech millionaires were created which was three times the number in the previous years.
The scenario has now changed considerably. The dotcom crash, the September 11 incident and the recession have brought down the share prices of almost all the companies. This has made most of the stock options to go underwater. A stock option is considered to be underwater when the exercise price of the company's stock exceeds the current market price. In other words, the value has been neutralized. This is because the employees holding the stock option would actually fare better buying the same stock in the market than exercising the options they have been granted through their employment.
Due to the bear market, stock options which were considered as win-win situation to both employees and employers have turned out to be a lose-lose situation. This has posed a serious problem to the company's management, as these stock options no longer are serving as inducements for retaining the employees. Losing key players at a critical time of economic recovery will make it harder for the company to rebound. This would also lower the morale of the employees. Watching anticipated wealth evaporate can have a demoralizing effect on the employees. When morale sags with the stocks, the company's productivity goes down in turn affecting the profits and shareholders' confidence. The number of stock options underwater is many across various countries and sectors.
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