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The Ghost of Options Past

Remember stock options? Those perks that made millionaires out of rank-and-file employees? Whatever happened to those things anyway?

I haven't thought about stock options in years, although they fueled lots of debate in the high-tech industry as recently as 2005. A press release issued Wednesday by {complink 4863|Semtech Corp.} reminded me what all the fuss was about.

    Semtech announced it has entered into an agreement in principle to settle all claims asserted against all defendants in the putative class action concerning the company's stock option accounting practices captioned In re Semtech Corporation Securities Litigation, Case No. 2:07-cv-07114-CAS (C.D. Cal). The agreement in principle provides for the payment of $20 million by the company. The agreement in principle contemplates the negotiation and execution of a final settlement agreement. The proposed settlement would fully resolve all claims against the company, all current officers and directors of the company named in the lawsuit, and certain former officers and directors of the company named in the lawsuit. No parties admit any wrongdoing as part of the proposed settlement. The settlement also is subject to preliminary approval by the court, notice to the putative class and subsequent final approval by the court.

Stock options — for those of you just joining us — served several functions in the tech industry. For startups, they held the promise of great wealth when your company went public. For employees, they were part of an incentive plan. Employees were granted stock options at the current market price, and any future increase in the stock price directly benefited the employee.

Accounting rules prior to June 2005 didn't require companies to calculate stock options' impact on earnings. They just had to be disclosed as footnotes. Tech companies vehemently contested an accounting change at that time, which required options to be charged against earnings, arguing that the new rules would ultimately hurt employee morale and increase employee turnover.

What they really meant was the change would hurt earnings statements and executive compensation because executives got oodles of stock options. There were also some funky rules that allowed backdating the options so they were vested at the highest possible price. This maximized the value of the options when they were sold.

Talk about the good old days! Stock options were only an issue if you had a job or were about to accept one. The recession — which was sending warning signals to the tech industry in late 2008 — quickly made stock option arguments irrelevant.

What other debates have become irrelevant since the recession? Let us know below.

6 comments on “The Ghost of Options Past

  1. stochastic excursion
    December 9, 2010

    The debate over which private school to send ones kids is definitely moot!

    The government's been quite aggressive in going after options backdating violators.  A microelectronics executive was recently ordered to wear an electronic bracelet confined to his house.  The ultimate irony would be if he made the parts that went into that bracelet.

     

  2. SP
    December 9, 2010

    These stock options are really great way to lure employees. It really works in well established and big companies but in start ups you just have to wait a long to see the results. Normally the terms and conditions on stock options are such a way that you can hardly make much money soon.

  3. AnalyzeThis
    December 9, 2010

    I have been interviewing recently, and some of the companies still seem to be offering options… no, it's not nearly as common as it used to be, but it's still around.

    But I do agree that the changes in accounting rules have certainly helped to defray their “power” somewhat and that the era of people expecting to get rich off their options is long gone.

    I believe I was much luckier when it came to options than most people, so I can't complain too much.

  4. DBertke
    December 9, 2010

    I remember those days well, when overnight a person could go from having a worthless piece of paper to suddenly owning the IRS hundreds of thousands of dollars in taxes.

    But seriously, Stock Options is indeed a good way to encourage employees to go above and beyond, even when the gain was not that large, they were a way to get people to feel more responsible about not only their work, but the quality of their work and products.

    In my first company, I was offered the option to buy 36 shares of the privately held company.  As being just an engineer, that was all I was allowed.  Annual dividend was one penny a share per year.  Oh and I had to pay two dollars a share.  Not overwhelming, but being a stockholder had very interesting side benefits.  At the annual stockholders meeting, we each recieved a very good meal and got to meet the real owners of the company.  Getting face time with the CEO and CFO can sometimes be very beneficial during issues when you have to go before either and discuss issues.  When the recall seeing you at the annual meetings, you get preferrential treatment over someone who just works for them.

    All in all, I greatly encourage companies to either provide stock options or at least an employee stock purchase plan.  There is no more tangible way to get people to buy into your corporate strategy than to make them part owners, even at 36 shares, it is still better than nothing.

    I know after the ENRON debacle, that owning your company stock, or being forced to get your 401K or profit sharing money in only company stock has been risky.  It still is, but if you agreed to work for the company, you must have had some commitment that they would prosper or you should not have joined the company.  As always, Buyer Beware!  But, if you do your homework on the company and its future growth and survivability, then it is fine to put some of your assets in your company stock.

    At my last company, I steadily invested in the employee stock purchase plan and am currently enjoying a 700% return on my investment.  So miricles can happen, but the circumstances in my purchases were unique, but in my case, the risk paid out.

    So if your company offers stock options or EPP plans, check them out.  If your company does not have them, ask why not.

    Good Luck,

    DAB

  5. Barbara Jorgensen
    December 9, 2010

    Thanks for the positive story, DB. It is easier to remember the abuses of the system rather than the folks that benefited from it. I appreciate the contrasting perspective–and good for you!

  6. elctrnx_lyf
    December 13, 2010

    I clearly agree with Dbertke in this regard. The companies who believe in themselves and who believe in people always share the profits with the employees. I know the case of ENRON was one black dot and could have impacted many employees to dissolve their stock. I feel the stock options will create a bond and attachment to the company.

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