Stock options are a good thing!

21 July 1999

At last stock options have begun to happen. But murmurs of protest persist. Some analysts are still saying that stock options will dilute earnings. This is hogwash. Earnings can be worse diluted if a company cannot attract or retain managerial and technical talent in today's intensely competitive environment, argues the author.

Everybody agrees that people are important in business. To build a good business, you need to build a good team. To attract and retain good people, you need to pay good money. Some companies are rich, and can pay high salaries without blinking an eyelid. Others have to think many times before doing so. They have to ask themselves: will our performance improve if we pay these higher salaries? If not, what is the point? But it's not easy to judge these things.

One way out is to tell a would-be employee, "Sorry, we'd love to have you, but there's no way we can pay you the salary you expect right away. But if our business grows, we can pay you more." But this doesn't convince the would-be employee. It's not a bird in hand. There's no guarantee that better performance will necessarily result in a better salary. So, no deal.

Who loses? The would-be employee loses an opportunity. But the company loses out more. Needless to say, its shareholders lose out too.

A stock option is a very useful means to get over this dilemma. All it does is limit the immediate cash outgo on account of an employee's salary. And it links further employee benefits to the company's performance. Also, such benefits are not paid out of the company's kitty but realised by the employee from a share sale in the market.