

Stock Options Boost Company Performance only when given to Executives - cwan
http://www.stanford.edu/group/knowledgebase/cgi-bin/2010/07/16/executive-stock-options-boost-company-performance-but-options-to-rank-and-file-workers-show-minimal-effect/

======
Tsagadai
Did they consider that options are pretty complex and for many people, with
the amounts offered, they are barely worth the effort. Other than the
questionable methodology of the study options are annoying, especially in the
small amounts offered to most low-level employees (in the offers that I have
received previously and that I've tried to help friends understand). Also,
there is the issue that they are only options (usually non-transferable) so
you also have to exercise them (that is, pay for them). I've met more than a
few people who just haven't had the cash handy to exercise options before they
expired. Then there is tax which can take lots of time and money to sort out
if you work for a multinational. Perhaps they should have considered that no
net gain does not provide an incentive. Unless you work for a company that is
going through record growth or you have the personal resources to capitalize
on stock (no debts or other things that need cash more urgently) then stock
options are practically worthless.

------
greyfade
So... They use stock price as an indicator of performance, and stock price
goes up when options are awarded to executives.

Brillant deduction.

Why don't they look at other factors like production volume or quality, or at
indicators like profit-to-cost or overhead, or at long-term markers like
workforce and pay growth? After all, these factors affect the economy. Stock
price only indicates investor confidence.

... Or is this study meant to benefit only investors and not the workers?

~~~
yuhong
I have been saying that stock price based compensation is fundamentally flawed
for a while now.

~~~
pyre
So... you were doing 'before it was cool' then?

------
dmk23
The findings make perfect sense if you re-interpret them as

    
    
      Stock Options Boost Company Performance ONLY when given to KEY INDIVIDUALS
    

In large public companies in most cases only senior executives are able to
make an impact measurable enough to move the needle for the entire business.
Therefore they are the ones you have to incentivize to make any kind of
impact.

In startups a few early employees can make a tremendous contribution or sink
the business. Therefore giving them incentives makes a lot of sense. As a
startup grows and the impact of specific individuals becomes diluted the stock
grants naturally shrink.

Do not forget non-US markets where employees often do not understand stock
options at all and therefore have trouble getting excited about them as much
as if you simply offer bonuses based on project completion.

All of this may seem unfair to quite a few people, but guess what life is
unfair. Get on with it. People do what they are incentivized to do.

------
ojbyrne
The study seems to be based on public (i.e. large and mature) companies, which
are most likely to have 17 layer deep bureaucracies, and nobody actually
listens to suggestions from below the top 2 layers. And top executives tend
towards sociopathy.

Conceivably this last characteristic leads to an additional confounding factor
- those executives generally have influence over when and how many options to
be granted, and would be best positioned to use insider information to put as
many of their options in the money as possible. A good example would be the
whole options-backdating scandal a while back.

The conclusion seems valid, but just reflects the reality of large public
companies.

------
ryanwaggoner
This seems like a good place to pose a question I've been thinking a lot about
recently:

What would be wrong with getting rid of options for employees, and just paying
market salaries and cash incentives like profit-sharing or bonuses?

HN has been replete lately with stories of early employees getting screwed
because they got too little cash and not enough equity. I completely get
wanting to let your employees share in the financial success of your business.
That's only fair. But equity isn't just about sharing in the financial
success, it's also about control. But unless I'm wrong, the 20% option pool
for employees is there for financial incentive, not to give employees a vote
in the election of the board or something.

So why not just skip the equity mess and reward people with the cash they're
trying to use equity as a proxy for?

Of course, this presumes that startups CAN pay people market salaries and HAVE
profits, both of which may be pipe dreams. Is that the only reason though? If
you started a really profitable company and never gave employees equity, but
were very generous with salaries, perks, bonuses, etc., would that dissuade
the best from working for you?

~~~
wycats
My preferred solution is consistent market salaries (a la Joel), annual profit
sharing (pro rata based on salaries, applies to management too in lieu of
bonuses), and a 10% employee bonus pool a la 37 Signals in the case of
liquidation.

This essentially gives employees regular shares of the annual windfall and a
way to share in any ultimate windfall.

I'd rather my employees get rewarded for their participation in company
success regularly, rather than asking them to wait for a sale that may never
come. And if an exit materializes, they should get something too.

Then again, my opinions on this may change as I gain more experience as an
entrepreneur.

~~~
BrainInAJar
" Then again, my opinions on this may change as I gain more experience as an
entrepreneur. "

Translation: as I turn in to the typical greedy startup founder shyster

~~~
wycats
Meh, I doubt it. My opinions will change if the approach I am taking now
result in significant failures to hire attract desired talent.

My current hypothesis is that potential hires will consider good compensation,
regular profit-sharing with the company, and significant upside in the case of
an "exit" competitive with (and hopefully much better than) the "normal"
offers.

if my hypothesis is disproven, I will need to revisit things.

------
groby_b
Let me reword that for you: Stock options are more effective when given to
people who can actually manipulate the stock price.

------
kinofcain
I can't tell from the article if they adjusted for quantity. Certainly stock
options have a larger incentive when you own more of them, which is typical
for executives.

------
bhattisatish
Why is this not surprising? Who has the power / responsibility to affect
things? A lowly poor programmer / line engineer / worker have power only to
meet their deadlines. Who can change things? The executives. So providing them
with options will make a difference as the incentives are aligned towards
people who can make a difference. But the biggest problem of the study? The
value of company performance is setup against stock values, which miss the
real performance metric: Revenue generation.

------
gersh
How much of the stock performance could be accounts from buybacks?

------
known
Isn't it obvious that bottom line need cash (not options) to meet their needs?

