|
Making Your
Workers Your Partners
By Sam Vaknin, Ph.D. |
|
There is
an inherent conflict between owners and managers of
companies. The former want, for instance, to minimize costs
- the latter to draw huge salaries as long as they are in
power (who knows what will transpire tomorrow). For
companies traded in the stock exchanges, the former wish to
maximize the value of the stocks (short term), the latter
might have a longer term view of things. In the USA,
shareholders place emphasis on the appreciation of the
stocks (the result of quarterly and annual profit figures).
This leaves little room for technological innovation,
investment in research and development and in
infrastructure. The theory is that workers who are also own
stocks will avoid these cancerous conflicts which, at times,
bring companies to ruin and, in many cases, dilapidate them
financially and technologically. Whether reality leaves up
to theory, is an altogether different question to which we
will dedicate a separate article.
A stock
option is the right to purchase (or sell - but this is not
applicable in our case) a stock at a specified price
(=strike price) on or before a given date. Stock options are
either not traded (in the case of private firms) or traded
in a stock exchange (in the case of public firms whose
shares are traded in a stock exchange).
Stock
options have many uses: they are popular investments and
speculative vehicles in many markets in the West, they are a
way to hedge (to insure) stock positions (in the case of put
options which allow you to sell your stocks at a pre-fixed
price). With very minor investment and very little risk (one
can lose only the money invested in buying the option) -
huge profits can be realized.
|
Creative
owners and shareholders began to use stock options to
provide their workers with an incentive to work for the
company and only for the company. Normally such perks were
reserved to the senior managers who were thought
indispensable. Later, as companies realized that their main
asset were their employees, all the workers began to enjoy
similar opportunities. Under an incentive stock option
scheme, an employee is given by the company (as part of his
compensation package) an option to purchase its shares at a
certain price (at or below market price at the time that the
option was granted) for a given number of years. Profits
derived from such options now constitute the main part of
the compensation of the top managers of the Fortune 500 in
the USA and the habit is catching on even with more
conservative Europe.
A Stock
Option Plan is an organized program for employees of a
corporation allowing them to buy its shares. Sometimes the
employer gives the employees subsidized loans to enable them
to invest in the shares or even matches their purchases: for
every share bought by the employee, the employer will give
him another free of charge. In many companies, employees are
offered the opportunity to buy the shares of the company at
a discount (which constitutes an immediate profit).
Dividends that the workers receive on the shares that they
hold can be reinvested by them in additional shares of the
firm (some firms do it for them automatically and without or
with reduced brokerage commissions). Many companies have
wage "set-aside" programs: employees regularly use a part of
their wages to purchase the shares of the company at the
prices which prevail at the time of purchase. Another well
known form is the Employee Stock Ownership Plan (ESOP)
whereby employees regularly accumulate shares and may
ultimately assume control of the company.
Let us
study in depth a few of these schemes:
It all
began with Ronald Reagan. His administration passed in
Congress the Economic Recovery Tax Act (ERTA - 1981) under
which certain kinds of stock options ("qualifying options")
were declared tax-free at the date that they were granted
and at the date that they were exercised. Profits on shares
sold after being held at least two years from the date that
they were granted or one year from the date that they were
transferred to an employee were subjected to preferential
(lower rate) capital gains tax. A new class of stock options
was thus invented: the "Qualifying Stock Option". Such an
option was legally regarded as a privilege granted to an
employee of the company that allowed him to purchase, for a
special price, shares of its capital stock (subject to
conditions of the Internal Revenue - the American income tax
- code). To qualify, the option plan must be approved by the
shareholders, the options must not be transferable (i.e.,
cannot be sold in the stock exchange or privately - at least
for a certain period of time). Additional conditions: the
exercise price must not be less than the market price of the
shares at the time that the options were issued and that the
employee who receives the stock options (the grantee) may
not own stock representing more than 10% of the company's
voting power unless the option price equals 110% of the
market price and the option is not exercisable for more than
five years following its grant. No income tax is payable by
the employee either at the time of the grant or at the time
that he converts the option to shares (which he can sell at
the stock exchange at a profit) - the exercise. If the
market price falls below the option price, another option,
with a lower exercise price can be issued. There is a
100,000 USD per employee limit on the value of the stock
covered by options that can be exercised in any one calendar
year.
This law
- designed to encourage closer bondage between workers and
their workplaces and to boost stock ownership - led to the
creation of Employee Stock Ownership Plans (ESOPs). Those
are programs which encourage employees to purchase stock in
their company. Employees may participate in the management
of the company. In certain cases - for instance, when the
company needs rescuing - they can even take control (without
losing their rights). Employees may offer wage concessions
or other concessions regarding the work rules in return for
ownership privileges - but only if otherwise a company is
liable to be closed down ("marginal facility").
How much
of its stock should a company offer to its workers and in
which manner?
There are
no rules (except that ownership and control need not be
transferred). A few of the methods:
The
company offers packages of shares cum options of different
sizes and the employees bid for them in open tender
The
company sells its shares to the employees on an equal basis
(all the members of the senior management, for instance,
have the right to buy the same number of shares) - and the
workers are then allowed to trade the shares between them
The
company could give one or more of the current shareholders
the right to offer his shares to the employees or to a
specific group of them.
The money
generated by the conversion of the stock options (when an
employee exercises his right and buys shares) usually goes
to the company. The company sets aside in its books a number
of shares sufficient to meet the demand which will be
generated by the conversion of all the stock options. If
necessary, the company will issue new shares to meet such a
demand. Rarely, the stock options are converted into shares
already held by other shareholders.
In one of
the next articles we will deal with the (surprisingly)
dubious efficacy of stock option plans.
About The
Author
Sam Vaknin is the author of "Malignant Self Love -
Narcissism Revisited" and "After the Rain - How the West
Lost the East". He is a columnist in "Central Europe
Review", United Press International (UPI) and ebookweb.org
and the editor of mental health and Central East Europe
categories in The Open Directory, Suite101 and
searcheurope.com. Until recently, he served as the Economic
Advisor to the Government of Macedonia.
His web
site: http://samvak.tripod.com
Article
Source: http://EzineArticles.com/
