Stock Options Boost Company Performance only when given to Executives | Hacker News Reader

Stock Options Boost Company Performance only when given to Executives

stanford.edu

34 pointscwan18 comments

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.

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?

Further, they tested executive only and worker only, but not executive+worker. It's certainly possible that worker stock options result in higher stock prices than executive alone, even if worker-only does not increase stock prices.

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

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

Why do I get the feeling that the people who designed this study are/aspire to be executive compensation consultants?

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.

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.

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?

With options, an employee can dream of making millions if the company becomes successful, but with most typical cash bonus/profit sharing there is no chance of that. The idea is that these mega cash-outs even if not very likely are more motivating than more modest size, but guaranteed bonuses.

Even if you were to structure a bonus/profit sharing plan such that employees could make millions, then you run the risk of key employees making a bundle of money and then leaving for the next opportunity. With options, by the time it is clear the employee will make millions from the options they almost certainly do not have enough cash to deal with the tax implications of exercising (unless there is a secondary market) and will be unlikely to leave until the company reaches a liquidity event (which is good for the company).

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.

" 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

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.

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

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.

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.

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

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

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