It is a standard practice for businesses to offer employees stock options in lieu of higher pay. Stocks excuse corporations from hefty tax burdens, while providing employees with incentive. As the company grows, the stocks become more valuable. However, the market can be tricky, and often times companies pay the price for their stock options. First off there is the risk of overhang, as many employees wait to exercise their options until the value has dropped to low. Secondly, employees who do not understand the stock market see no value in stocks. It provides no incentive for them, and they do nothing with the options they are given. Add in the overall costs of providing stock options one begins to wonder if an increase in salary is a better alternative.
Luckily, there is a third option. According to corporate lawyer Jeremy Goldstein a simple solution to stock options is a knockout clause. Knockout options protect companies from overhang and provide incentive to employees at the same time. The idea is that such options would have a shorter lifespan, and if the value of said stock dropped past a certain amount the employee would lose it. This creates an incentive to use the stock, as well as ensure the value stays the same. Knockout options provide the necessary benefit corporations need to compensate their employees and avoid unnecessary costs and disadvantages.
Jeremy Goldstein is a partner at Jeremy L. Goldstein & Associates LLC, a law firm specializing in compensation and management for corporations in governance matters. CEO’s come to them for matters pertaining to compensation costs and benefits for their perspective workforces. Jeremy Goldstein has been a part of many historic business transactions in his time. Notable among them is United Technologies acquisition of Goodrich, and the Verizon/ALLTELL merge.
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