Manage Your Expectations To Avoid The Option Blues
People who hold options in their companies sometimes feel they have been let down. When stock prices drop, options can go underwater, and expected option riches may not materialize.
Getting less than you expected is something that inevitably occurs in a free market. Your company's shareholders have had to face the same realities with their cash investment. Remember that you and your co-workers joined them as partial owners of your business when you accepted those options.
As someone who has talked with thousands of people about equity-compensation programs, one of the most frequent challenges I see is unrealistic expectations. People expected, or were led to expect, that the only question was how much their stock comp would add to their take-home pay, not whether they would. When I was at Ownership Associates, our attitude surveys of employees in equity-compensation programs showed that employees in companies do tend to have high expectations for their companies.
These expectations can come from any number of places: official communications from company leaders, general market euphoria, or the intra-office "buzz" of the rumor mill. However, expectations about your company's financial performance need to be separated from how the stock market treats your company's stock price.
Generally speaking, people with stock options make two types of financial assumptions, either or both of which can be wrong.
First, people often believe that the company and its stock price will both continue to improve at roughly the same rate that they have historically. As brokers are fond of saying, "past performance is no indication of future returns."
Second, people assume that better company performance equals a higher stock price. Unfortunately, performance is only one factor that determines stock price, as even the best securities analysts will admit. While performance is a crucial factor and the only one that insiders can realistically affect, there are lots of other factors that determine the value of your company's stock: competitors, customers, investor psychology, interest rates, the price of oil, the weather, long-distance rates, and teenage fashion.
Maybe you recently realized you were making one of these assumptions, and maybe you're disappointed to find out the assumption was wrong. It hurts, but the fact about being an owner is that unexpected losses will happen as long as we keep a free market economy.
The Silver Lining
Where’s the silver lining? If your options seem to be worth "zip," what’s the point of coming to work every day? There are still lots of good reasons.
First, you have not lost money. Options give you a direct line to the success of the company. The stock goes up, you win. The stock goes down, you lose. But with options, you really don’t lose. What actually happens is that you don't gain. It may feel like the same thing as losing if you were counting on your options for some short-term goal. Bear in mind, though, that you haven’t invested your own cash like your company's shareholders have.
Second, your options are not worth "nothing." If they’re underwater, they would be worth zero if you had to exercise them today. But with most options, you can hold on to them for years.
Under option valuation models, as explained in a related article, even underwater options can have a positive value. Your options still give you a claim on the long-term success of the company, just so long as you and your colleagues can increase the company's value.
Third, is it all about money? To many people, it's important to work in places where they can consider themselves owners. It's like being self-employed, except that it’s you and all your co-workers who are collectively self-employed, instead of you having to run a small business on your own.
Maybe you work crazy hours, but at least to some extent, it’s self-exploitation, and your salary is competitive. Our research, which draws on data from employees at 18 companies employing over 12,000 people, shows that people really do care about ownership in its own right. When we ask people to rate how important ownership is to them on a scale of 1 to 10, a reliably small group (15% on average) rates ownership in the lower half of the scale. Fully two-thirds give ownership one of the top three rankings, and 30% give it the highest possible score.
What Ownership Means
Maybe the next question is whether you really do feel like an owner. Well, you probably aren't an owner in the old-time, sole-proprietor sense of the word. To some extent, that's a good thing. You didn't sink your life savings into the business, and you’re not going to be held personally liable for all the company’s debts.
Just as you don’t personally bear all the risks that the company faces, you don’t personally receive all the rewards. Options are one way you get a portion of the rewards of ownership in exchange for your hard work and long-term efforts to make the company more valuable.
But ownership is about a lot more than money. In fact, many employees even claim that it’s more important to be treated fairly by the company than to get the maximum financial rewards, according to our research. Unfortunately, accepting a portion of the company's losses is part of fairness. You share in the upside; you take a hit in the downtimes.
What else might make you feel like an owner? We can go back to fundamentals with the legal scholars who research the origins, history, and applications of ownership as a concept. They agree that three factors are essential to the concept of ownership: owners receive information about that which is owned, they have a degree of control, and they realize the financial consequences that are tied to the success of the business. The psychologists who study what makes people feel like owners come to almost the same conclusions.
Not Your Parents’ Job OR Working In The New Paradigm
Clearly you suffer (and enjoy) the financial consequences of the ups and downs of business, but what about the other factors? Let’s take a quick look at each of these.
You receive information about your company. That’s true even if the only data you get is the stock price, the SEC filings, and your account statements. In most companies that grant options, you get much more. On average, the stock option and stock purchase plans make employees want to learn more. Companies tend to oblige with training and access to information at a level that would boggle the minds of previous generations.
You probably have a good idea what your company’s strategy is, who the biggest competitors are, what those competitors are doing, and how your technology is changing. Maybe you’ve come to take the information for granted. This is very different from the way employees have been treated for much of the history of the United States. Your company probably treats you more like an owner than your parents' companies treated them.
What about influence? Maybe all the control you have is in how you do your job, but that’s still a way you have input in how your company operates. Our research shows that in many option-granting companies, people have more influence than ever before. Employees are increasingly involved in running the business. Companies are more-and-more likely to use cross-functional teams to set strategies, to systematically gather input, to use 360-degree job reviews (where every employee’s job performance is evaluated by supervisors, peers, and subordinates), and to use other techniques to involve you in the business.
So what’s the upshot? Abstract ideas like "ownership" and "loyalty" may be hard to get your arms around, but they're what your company is trying to encourage with its stock plans. Because you were granted options (or offered participation in an employee stock purchase plan), effectively you are a partial owner with the rewards and few risks. You are an employee-owner.
Maybe no one at your company has ever called you an owner, or maybe they've said it so many times it's begun to sound meaningless. However, it’s true -- you have a portion of the bundle of rights that make up ownership, and your long-term wealth is tied to the success of your company’s business, in good times and bad.
Loren Rodgers is the executive director of the National Center for Employee Ownership (NCEO) in Oakland, CA. This article was published solely for its content and quality. Neither Loren nor his employer compensated us in exchange for its publication.