How companies shaft employees: stock options

If you’ve read my last post you know that corporate officials, i.e. “suits”, are out for their own financial benefit and not for the benefit of the company employees. Take stock options. SEC rules and various laws generally require companies to offer employee stock options equally to all employees.

So you’ve just graduated from college and get hired at Megacorp. During orientation, they tell you that you are entitled to employee stock options. What are those? They are the right to buy company stock at lower than market prices or at a fixed price. Great! you think. That’s a guaranteed profit; buy low then sell at market. Not so fast. You usually don’t get to exercise the options until they’ve “vested.” Typically that’s after you’ve been an employee for five years, although terms vary. SEC rules also prevent insiders, including you, from selling except during certain periods. Also, if the stock doesn’t do well, your option may be worthless, but it’s usually a freebie or low-risk purchase. Other rules apply and taxation varies depending on the type of options. It can be complicated and the topic in general is beyond the scope of this post.

I mainly want to focus on one aspect employers, i.e. the suits, use to game the system and benefit themselves at the expense of the employees. Since options hold the potential to sell at a profit, the suits don’t want a lot of other people selling their shares at the same time, which would depress the price and lower their profits. So how do they prevent it? Through layoffs or scheduled firing of employees before their options vest. People like you work for Megacorp (or a startup – they’re probably even worse) for four and half years and suddenly you get a pink slip. You were doing a good job, you think. Well, they don’t want you and everyone in your entry “class” to exercise their options. You end up abandoning them unexercised. Some state laws may give you some rights, but in general this sort of thing happens a lot.

It’s not just about stock options, though. The related issue is salary. People expect regular salary increases as they gain experience and seniority. In many industries it’s cheaper to hire and train new people constantly and let the senior ones go. It may seem cruel and unfair, but from a business perspective, it’s a valid business reason. They will probably keep the best workers, but they will cull the crop at about that time. Big law firms typically hire new associates every year, and by year five or maybe seven a few will make partner, but most will be shown the door if they haven’t made partner by then. Employers have always cherry-picked the best people, but most used to keep the rest on in lower-paid jobs until retirement. That’s less common now. The difference between the salary culling and stock option culling is that most employees know or expect that they will hit a ceiling on salary at some point but they do not realize that the stock option promise is a false one.

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