Up to 10 Million Employees Receive Stock Options Nationwide
The fairy tale used to be about a princess who finds her prince by kissing a frog.
Now, the fable is about a secretary who becomes a millionaire a year or two after taking a job at an unknown start-up that offered stock options.
While this version may not be quite as romantic, the publicity surrounding these princely companies has made stock options more popular, according to Ed Carberry, research director for the National Center for Employee Ownership.
Basically, a stock option allows an employee to receive the right to buy stock at a set price and period of time and the plan can be tailored to a company’s needs, Carberry said. However, stock options are just one method in which employee ownership can be accomplished.
The NCEO, a nonprofit research organization in Oakland, recently released findings that between 7 million and 10 million employees receive stock options nationwide. In the early 1990s, the organization estimated that about 1 million employees were eligible to receive stock options.
The growth is especially notable in areas such as San Diego, Silicon Valley and other hubs for high-tech and start-up companies, he said.
– Stock Options An
The use of stock options has also become a popular way for businesses, especially high-tech and start-up companies, to attract and retain employees, Carberry said, adding that larger public companies outside this sector are also offering options.
In San Diego, stock options are critical for the recruitment and retention of employees, especially with smaller companies, which use options as leverage for top-notch professionals, according to Ron Bernstein, associate director of the Foundation for Enterprise Development (FED).
Providing information and assistance on effective equity compensation and employee involvement strategies, the nonprofit foundation was established in 1986 by Robert Beyster, founder of Science Applications International Corp.
Although top-level managers and executives used to be the prime beneficiaries of these options, the opportunity is now being offered to employees at every level of the company, Carberry said.
Many believe that employees will feel linked to a company’s success if they own part of it, he said.
“There is this concept that employees are going to be more motivated and that the company is going to do better,” he said.
– Employee Ownership
May Affect Bottom Line
While there is no concrete study to back up this idea, some research has shown that employee ownership combined with a culture of ownership can have an impact on the bottom line, he said.
Although stock options may seem like a happy ending waiting to happen, the pot of gold at the end of the rainbow may turn out to be empty for some.
“You will see many companies and you will see a lot of people with stock options that can paste their options on the wall because they will be worthless. In other cases, of course, they can worth quite a bit,” Bernstein said.
But being a private company doesn’t necessarily mean that the gold is fake.
San Diego-based SAIC was formed as an employee-owned company in 1969. Although the 39,000-employee company is private, SAIC has created an internal market for its stock, which is about $25 right now, according to the company’s Web site.
The stock options help the company be fair to its employees by letting them benefit from SAIC’s success, according to Peggy Walkush, director of employee owner relations for SAIC.
– Sometimes Stock Is
Offered As A Reward
All employees are eligible for stock options and many have purchased stock through a two-for-the-price-of-one program for first-time buyers or have received stock as a reward from managers, she said.
Citing the company’s low turnover rate, Walkush said there have been tremendous benefits in employee motivation, commitment, recruitment and retention.
The fact that the company is established in the industry also helps SAIC with recruitment, she said.
While having stability has eliminated some of the risk of stock options, Walkush said that SAIC has experienced an average annual growth rate of 45 percent for the past five years, which is exciting to employees.
“We offer the best of both worlds,” she said, estimating that about 60 percent of employees have purchased stock through their stock options.
– Educating Employees
On Ownership Benefits
While employee ownership has helped foster interest in the success of the company, Walkush said that it would not have been possible without education.
Employees “have the excitement and the interest, and then it’s up to the managers to make sure employees understand how they can affect the bottom line,” she said.
Bernstein agreed, saying that employees have to really understand how their actions affect the company.
Stock option education can also benefit owners. Mark Fackler, president and CEO of San Diego-based Stellcom, has always believed that employees deserved more than just a salary, although it didn’t happen overnight.
“It took me many years to understand that ownership and leadership have nothing to do with each other,” said Fackler, who will soon trade hats and become chairman and founder of the company.
Twelve years after starting the business in San Diego, Fackler decided to make it an employee-owned company.
– Company Owner Makes
An Informed Decision
After learning the logistics of employee ownership and attending a dozen monthly FED meetings, Fackler finally made his decision at a conference when he met the proud owners of employee-owned companies.
Now, every Stellcom employee is eligible to receive stock options commensurate with their position in the company.
Used for recruitment and retention, stock options are also used as a reward and incentive for employees who complete a certain type of training, come up with a cost-saving idea or provide incredible customer service, Fackler said.
Like SAIC, Stellcom benefits from being established in the industry and a growing belief that the company’s stock will be worth something, he said.
The company opened an office in Los Angeles last year and just recently opened one in Phoenix. Fackler expects to have about 500 employees by the end of the year.
With talk of the company going public and the announcement of more venture capital and a new CEO, employees have been purchasing more stock, he said.
– Recruiting Talented
People Less Difficult
As the rainbow’s end appears closer, Fackler said recruiting talented people for the company is not exactly easier, but certainly less difficult.
With hopes of finding his pot of gold in the company’s parking lot one day soon, he said that “the real satisfaction will be to create a bunch of millionaires,” he said.
But for every happy ending, there may be many frogs that never became princes.
Echoing the sentiments of others, he said that 95 percent of new companies will go out of business, making the stock options worthless.
“Only the best of the best will survive,” he said, adding that stock options do not necessarily make a company more likely to survive.