Stock options have become more prevalent in business use as a means to incentivize employees with compensation tied to the firm’s performance.
At a first glance, options have strong appeal to both worker’s and the company’s management. The principle behind this form of compensation is simple. Learn more about Jeremy Goldstein: http://jlgassociates.com/ and https://corpgov.law.harvard.edu/contributor/jeremy-goldstein/
As the business’ profitability rises, the increase in the value of the company is reflected by higher share prices above what it was when the employee was assigned her options price. This gives workers the incentive to work harder to promote the success of the company.
However, in actual practice, employees have grown suspicious of stock options, which are tied to the value of the company that can also be affected by stock market performance that is outside of their or management’s control. Higher salaries and better benefits are perceived as more attractive to employees who have felt the sting of options that expire worthless.
Because of the complicated IRS rules that govern equity-based compensation, giving shares to employees is not a viable alternative.
Another challenge to management comes from the perceptions of outsider shareholders who expose themselves to options overhang caused by insider options that will not be exercised because their strike price exceeds the equity’s market value.
The knock-out barrier option provides an attractive means to address these situations.
Having the same vesting requirements and exercise time-frames as their traditional stock options, knock-out barrier options add the ability to set an expiration tied to the equity’s price, making it attractive in situations such as $100 options, where the price has been at $50 or lower for some time.
With knock-out barrier options, marketplace investors benefit from not having the overhang threat from insiders holding options that they can never exercise.
Additionally, executive salaries are generally lower in compensation packages that substitute knock-out options over their conventional counterparts reflecting better numbers in the firm’s financial statements.
Management improves their ability to re-incentivize their employees should the company’s share price drop substantially lower than their option prices for prolonged periods.
Jeremy L. Goldstein & Associates, LLC provides boutique legal services and consulting on corporate governance and compensation-related matters to CEO’s, corporation and their management teams.
According to Chambers and Partners, Jeremy Goldstein serves as chairman of the American Bar Association, Business Section’s Mergers and Acquisitions sub-committee.