Stock Options Make Good Sense

Robert C. Pini

The photonics industry is full of start-up companies and new ventures -- fledgling enterprises in a position to get all the advantages from offering stock options to spur employee performance. So says Richard Lambert, an accounting professor at Stanford University's business school. As a direct link between pay and performance, stock options are "most effective in smaller, entrepreneurial firms because even employees below the executive level have a significant impact on the value of the firm," Lambert said.
FiberCore Inc. in Charlton, Mass., gives stock options to employees at various levels when they sign on and when they make a significant contribution to the company, such as for patent or design development. "It works for us, no doubt about it. You get a committed bunch of individuals," said Chuck Delucca, FiberCore's executive vice president.
Silicon Valley firms are known for handing out stock options to recruit topflight talent. Yet companies there are reporting that the lure of stock options is beginning to fade as a recruitment tool in the recent bearish market, and talented new hires are beginning to ask for cash. But Delucca pointed out that a bear market isn't necessarily the time to worry. "The incentive-driven employee recognizes when he sees a down market [that he] can get more shares and value."
When employees see their stock value tumble in a bear market, experts advise against repricing the options to restore incentives and keep employees from leaving. "Repricing causes a lot of problems," Delucca said, because it favors company insiders and infuriates other shareholders who don't benefit.
New Focus Inc. in Santa Clara, Calif., uses stock options to recruit and reward employees. But controller Dave Shoquist advised using them carefully to avoid compensating some employees far out of line with company salary structures and leaving other colleagues disgruntled.
Stock option plans are regulated by the government, so one qualified plan is similar to any other. The big difference between plans comes from how many options employers hand out and how fast the company's earnings are growing. In today's frenzied market, investors enchanted by the lucrative potential of an exciting technology can bid up share prices far beyond the company's real earnings. "I suppose [our options] would be doing much better if we were 'internet.beanie-babies.com,'" said Cornelius McCarthy, president of Accuracy Microsensors in Pittsford, N.Y.
Perhaps, but most investors would likely prefer solid performance to paper millions. As a C corporation, McCarthy's company is privately held by a small group of investors, so stock options still can be used as a plum for recruitment even though shares are not publicly traded.