When it comes to employees’ benefits and compensation, the options are limited by IRS regulations and the remaining options such as stock option must be thoroughly understood to prevent losses to the firm. A while ago, companies were dishing out stock options to employees, but today this trend has changed. Companies claim that the option is no longer practical because;
Many firms consider the options an accounting burden. The cost of keeping records of how the stock options differ with time surpasses the benefit enjoyed by the company. Secondly, employees prefer an increase in salary as compared to the stock option. To them, having stocks is like gambling in a casino. Losses are inevitable. Lastly, the value of the stocks may fall significantly such that employees end up with nothing.
Although the stock compensation option has several disadvantages, there are some benefits that a firm could enjoy if the option is efficiently managed. A company has an easy time providing stock options to employees because IRS has made it very difficult for companies to offer alternative compensations such as equities. With stocks, the employees work hard to put the company in a better financial position because a company’s profit translates to better benefit to them. Furthermore, the stock option is easy to understand and sell to your employees.
To enjoy the benefits mentioned above, a firm must employ a strategy known as knockout strategy. With this, the company can reduce overhang expenses and accounting costs associated with options. Knock out allows employees to own the options but lose them when the value of the stock falls below half. Due to the fluctuating nature of options, an employee loses the options once the price has remained below half of the buying price for a whole week.
According to Jeremy Goldstein, such a strategy makes the staff more motivated to ensure that the stock value does not fall below the minimum allowed limited. The non-employees shareholders do not face overhang threats, and the company’s capital can be reflected accurately because there is reduced executive compensation per year. While applying knockout, it is essential to let the auditing department know the changes employees will face.
Jeremy Goldstein has a vast knowledge of business law. He has practiced for more than 15 years as a partner at Wachtell, Lipton, Rosen & Katz and later opened his law firm the Jeremy L. Goldstein & Associates LLC in New York.
Jeremy Goldstein worked as an associate at Shearman & Sterling LLP for one year after graduating from New York University School of law in 1999. He has worked with distinguished clients such as Chevron, Bank One and Duke Energy among others.