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The lure of stock options
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January 26, 1999: 11:44 a.m. ET
Despite success stories at Microsoft, Dell and Excite, experts advocate caution
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NEW YORK (CNNfn) - He figured he could live pretty comfortably as an editor at a well-known Internet company with a $50,000-something salary.
But he never realized that stock options valued at hundreds of thousands of dollars would change his life forever.
"Now I'm dreaming about where I might retire, and what things I might want to do," says "Paul," 40, who didn't want to be identified.
A stock option plan is the brass ring of the 1990s workplace. Once a perk reserved for top executives, stock options have made millionaires out of mid-level employees at Dell Computer (DELL), Microsoft (MSFT) and dozens of other companies.
More recently, options at Web portal Excite (XCIT) soared to $1.04 billion in value, or an average of roughly $1.49 million per employee, after cable Internet provider @Home (ATHM) announced a $6.7 billion merger, according to the Executive Compensation Advisory Services in Springfield, Va.
But stock options aren't something you should chase blindly when you're looking for a job, career counselors and market analysts said. As with other benefits, you need to weigh the variables carefully.
"The Excite situation is terrific, but it's ridiculous if you assume that every time someone dangles stock options like a carrot you're going to win," said Paul Bernard, a career consultant and principal at Paul Bernard & Co. in New York. "When you're tying your future to the company as well as the stock market, you're adding a whole level of the unknown."
More millionaires?
Stock options have transformed Corporate America since they started growing in popularity about 10 years ago, said Bob Gore, a consultant on workplace issues and a principal at Towers Perrin in Boston.
High-tech companies and start-ups with limited cash typically use them in lieu of higher salaries, Gore said. In some cases, a company that doesn't have a retirement plan will offer options instead, he said.
"I've got one client where about a third of the employees, about 1,000 people, are millionaires because of stock options," Gore said. He wouldn't identify the company.
Likewise, a number of established businesses in the Fortune 1000 list of companies offer options to all of their employees, said Jim Klein, tax partner at Deloitte & Touche in New York, who has tracked the issue for years.
While nobody keeps statistics, Klein estimated that about 20 percent of the Fortune 1000 have some type of options plan. Out of those companies, perhaps 20 percent are broad-based.
"It's an investment where you don't have to risk any of your own capital," Klein said.
In the case of Excite, the company has 10.96 million stock options at an aggregate price of $20.49 per share, said Carol Bowie, director of research at Executive Compensation Advisory Services. (The numbers are on file with the Securities and Exchange Commission).
With a bid price from @Home of $115.70 per share, each Excite option is worth $95.21, for a total of $1.04 billion, Bowie said. That's an average of $1.49 million for each of the roughly 700 employees. Of course, not everyone has the same number of options.
Even without the merger, employees would get an average of $932,607 if they exercised those options based on a stock price of $80, Bowie said.
"For these high-tech start-ups, there's astounding value that these stock options are adding," Bowie said.
At Dell Computer, employees are "amused" by the familiar phrase 'Dellionaires," but the company has found stock options an important way to attract top talent in a highly competitive environment, said spokesman T.R. Reid.
"When it comes to recruiting and retaining the type of people this company needs, stock options aren't the only important compensation tool, but they are an important one," Reid said.
Other companies that have options plans are Merck (MRK), DuPont Co. (DD), Starbucks (SBUX), and retailers like Wal-Mart (WMT), company spokesmen said.
"Stock options have played a major role in the United States in helping the economy as a whole, but they've also created thousands of millionaires," said Ira Kay, practice director of executive compensation at Watson Wyatt in New York. "Stock options have been as successful as the stock market."
How it works
With stock options, the company gives you the right to buy a set number of shares in the future at a certain price.
For example, you might get an option for 10,000 shares at a price of $25 a share that you can "exercise" after three years regardless of the stock price. So if the stock rises to $150 a share, you still pay $25 an issue. Normally, the plans "expire" after 10 years.
In other plans, you get to exercise your right when the stock increases by 50 percent in value, he said.
In a non-qualified plan, you pay taxes on the capital gains when you exercise your option, Klein said. But in an incentive stock option plan, called an ISO, which is limited to shares valued at $100,000, you can exercise the option and you don't have to pay taxes on the capital gains until you sell them.
Compensation consultants have complicated formulas to figure out how many stock options you'll get, Klein said. For example, if $100,000 is the normal salary for your position, the company might offer you $60,000 in salary and $40,000 worth of stock options.
Be careful
Stock options aren't always a home run, however. So you need to push for a salary that you can live on whether or not the company scores a success on Wall Street, Bernard said.
"I've heard of people who've bought apartments in New York they can't afford, or who've stopped putting money into their kids' college funds, because of stock options," Bernard said.
And with private companies that plan to go public, you really don't know what will happen once the stock starts trading. While analysts can estimate the price, any number of recent Internet IPOs show that the stock can also skyrocket 600 percent. On the other hand, depending on what's happening with the market, the offering can fail miserably.
One of Bernard's clients thought he'd make millions when he took a job with stock options at a hot Internet start-up last year. But his dreams died when the public offering fizzled -- along with all of his family's savings.
If you're negotiating a new job and you think the company carries too much risk, you might propose a percentage stake in the company in addition to stock options, Bernard said.
"The problem is sometimes people sell their souls with a low base salary thinking they're going to get $1.49 million like Excite," said Bernard, "Sometimes people will give up too much in search for that Holy Grail." 
-- by staff writer Martine Costello
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