Their complaint is not just that they fear anything that eats into their hard-earned profits.
They fear anything that will reduce the use of stock options, thus damaging the "Silicon Valley culture. Rodgers, the CEO of Cypress Semiconductor and an oft-quoted defender of options, puts it, he wants "employee shareholders," not "employees. What bugs me about my management friends in the Valley and elsewhere is that they make bold assertions about what practices managers ought to employ without looking at the evidence--and plenty exists in this case--to decide whether the practice is smart.
Does the amount of equity owned by CEOs, officers, or directors even affect a company's financial performance? A review of empirical studies found no consistent link between equity ownership and stock performance.
Even more damning is a study that looked at option grants at the top 1, U. Is holding a bucket of options really the same as owning the stock, genuinely creating "employee shareholders"? Most employees sell their stock the day they exercise their options, and in fact are advised to do so to ensure that they don't end up being taxed on a gain that disappears if the stock declines.
Motivating Employees with Stock and Involvement
We all heard stories about this after technology stocks began their descent a few years ago. Moreover, receiving an option is nothing like buying stock. The experience lacks the psychological commitment because the employee has no skin in the game; he or she did not spend a penny to get the option.
So, unlike the poor common shareholder, the employee loses nothing if the stock price falls and the option becomes worthless. Of course, if the stock price soars above the option price, the option holder profits handsomely--all without risking any capital.
What behavior does this encourage? Just think back over the past year or two. But don't employee options help retain employees? Underwater options don't help anyone, which is why as the bubble deflated, companies began repricing their options.
When that didn't work, they simply issued more. If options are in the money, employees can reap the gains once they vest and then move on--and there's no evidence that they don't. This is why companies continually issue more options, known in option-speak as "refreshing. Companies like Siebel Systems have option overhangs of as much as 32 percent of their outstanding shares, meaning a whole lot of employees will be cashing in, eventually hurting Siebel's bottom line.
It's not hard to understand why top executives are so in favor of stock options: Plenty have become super-wealthy because of them.
This is the reason Harvard law professor Lucian Arye Bebchuk and two colleagues argue in a recent paper that to understand executive compensation, it's better to look at theories of managerial power than at the alignment of incentives among shareholders, senior executives, and employees.
Too many executives make decisions about compensation--and other practices--based on belief, ideology, and unexamined assumptions. If doctors practiced medicine the way many executives practice management, with so little concern for data and evidence, far more of us would be dead.
Dee II Professor of Organizational Behavior at Stanford University's Graduate School of Business. Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes.
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