From the November 2009 issue of Entrepreneur
Candid Talk About Stock Options

I Did the Work--Now Pay Me
I like money. There, I said it. I work unbelievably hard and it took me a long time to get to my level. So I think I should get choices about my compensation--and I wouldn't choose stock options.

I had a great year. I delivered. I hit the numbers the company wanted me to--and more. But at my level, where a 60-hour workweek is expected and the pressure and stress are unbelievable, there's no discussion: You take a big chunk of your reward in stock options. They can amount to as much as half your pay and bonus! You may have negotiated, as I did, to get a certain overall compensation number. But then the company tells you, especially as you climb the ladder: You need to take a bigger interest in the bottom line. So they give you stock options--and they tell you they didn't have to give you these and it's a privilege.

Well, I can do many things for my company, but I can't move the share price. I can't control the economy or the guys in another division. I can make my area succeed, and I did. But the way the options work, the whole company has to grow and its share price has to increase. And it all has to happen when your options have vested and hit their strike price, or they're worthless. Mine were part of an incentive for a job well done--I was looking at maybe $200,000. But they're all so far under water they won't ever be worth a dime.

Because options have become such a big part of how we're paid, many managers just ask: What's the number I've got to hit to get them? It's created a lack of integrity, a bad culture where some would manipulate circumstances just to hit their numbers. It's actually de-motivating.

The company tried other things too. They let us swap the options we had for even more options, at a lower price. But you also were putting more of your own money in, like doubling-down on a bet. Lots of my colleagues did it and they've lost even more than I have. Other times we got restricted shares, which are like options: You wait for them to vest and to hit a target price. Here's the catch: You pay some taxes on restricted shares in the year you get them, even though they may never be worth anything to you.

So, cut my bonus--please! Just give it to me in cash. Promising me options will just take away my incentive. I put in sweat and blood, I stayed and I hoped. Now I'm stuck and royally screwed. If I figure the labor I put in and my compensation, minus the worthless options, I made, what, $3 an hour? The promise of a big payday just isn't worth my sanity.

--As told to Craig Matsuda

 



You Have to Watch Out for Yourself
It's one of the first things they tell you in business school and you hear it for the rest of your work life: Your role in management is to enhance shareholder value. Employee stock options align the interests of key players in a company with what's needed to add shareholder value, and that's beneficial. They're everywhere in business now.

My company was a private startup. Everyone got options at first because the company recognized that we were a risky place to work. It panned out for those who got in early. When we were bought out by a conglomerate, suddenly there were secretaries driving new BMWs.

As the years went by, we kept employee stock options. If you're in Silicon Valley or connected to it, there's no choice. We told the new owners and their board that we had to have them to stay competitive in attracting and retaining talent.

For our most valuable tech types and top management, we had an "evergreen" plan: With board approval, we kept providing additional options. I guess, finally, about a third of our staff had them. We wanted to keep them. We wanted them to keep doing great things. We hoped options would help.

But there was a problem: We were a small part of a big concern. We grew. We made money--our revenues went up by hundreds of millions over several years. But by ourselves we couldn't move the share price. It kept falling, so most of the options were under water. By then, even I had thousands. Like everyone else's, they were worthless.

I think the company was clear about options and the potential for unrealized gain. Still, our management heard the frustration about underwater options, so we shifted the emphasis to a bonus pool. We made a concerted effort to expand it deeper and wider into the workforce. We could control it more too. In good years, the pool was bigger--and in the bad, people knew why there was less to share. The performance rewards were immediate and concrete, without carrying over year to year like pay increases.

If people take risks, do good work and add to shareholder value, they should realize gains, but options are not the only way to make that happen. In certain industries, say, high-tech, they're still a must because people expect them. That's true in startups and high-risk enterprises too. But I wouldn't go to a place just for them, and I wouldn't hang around, waiting to see what happened to mine. You need to watch out for your career, your opportunities to grow and yourself. Options aren't money in the bank.

--As told to Craig Matsuda

 

Who Says Crime Doesn't Pay?

Who Says Crime Doesn't Pay?
In the annals of white-collar crime, the recent rash of "backdating" executive stock options deserves its own fat chapter.

By 2006, more than 100 top companies or their CEOs were under investigation by the SEC and U.S. Department of Justice for changing the grant dates on options back to time when the shares were at a significantly lower price. Despite the high number, the Wall Street Journal recently reported that most companies that improperly backdated options were never even caught.

And what of those that were? Here's a look at some of the most sensational cases. --Kara Ohngren

Jacob "Kobi" Alexander
Former CEO
Comverse Technology
Charges: In 2007, Alexander was indicted on 35 counts of conspiracy, securities fraud and money laundering in connection with backdating stock options.

Case status: Alexander was declared a fugitive in 2006 when he failed to return from a family holiday in Israel to face questioning. He then fled to Namibia, where he bought a $450,000 home at a golf resort and enrolled his children in school. The extradition battle is ongoing.

Bruce Karatz
Former chairman/CEO
KB Home
Charges: Karatz was indicted in March on 20 counts, which include charges of fraud and making false statements regarding the backdating of stock options from 1999 to 2006. Over a three-year period ending in 2005, Karatz earned more than $232 million.

Case status: Karatz has been forced to pay $20 million to KB Home and the federal government. He faces up to 415 years in prison if convicted on all counts.

Greg Reyes
Former CEO
Brocade Communications
Charges:
In 2007, Reyes was convicted on 10 criminal counts of conspiracy and fraud. He was accused of intentionally changing the grant dates for hundreds of stock option awards without disclosing the move to investors.

Case Status: Reyes was sentenced to 21 months in prison and a $15 million fine. But in August, a U.S. court overturned his conviction and ordered a new trial, citing misconduct by prosecutors.

Henry Samueli
Co-founder
Broadcom Corp.

Charges: In June 2008, the billionaire and owner of the Anaheim Ducks hockey team pleaded guilty to a felony charge of lying to SEC regulators about his role in manipulating stock options.

Case status: At press time, Samueli was awaiting sentencing. Meanwhile, Broadcom settled a shareholders' lawsuit in September, agreeing to pay $118 million without admitting wrongdoing, plus an additional $11.5 million in legal fees and expenses.