Creating a Partnership with Your Employees

The relationship between business owners and management is fraught with tension. For example, the former group is interested in cutting expenses as much as possible, whereas the later group plans to collect enormous salaries while they are in power (tomorrow's events being what they are). Companies listed on stock exchanges may have a longer-term perspective on things, while the former may be more focused on the short-term goal of increasing stock value. Stock price appreciation, as measured by quarterly and yearly profit numbers, is important to American shareholders. This reduces the available funds for infrastructure investment, research and development, and technological innovation. The idea is that employees who also hold shares will steer clear of these destructive feuds that can bankrupt and technologically derail businesses. We shall devote a whole piece to the entirely unrelated subject of whether reality remains dependent on theory.

One can get a stock option if they want to buy (or sell, although we won't be dealing with stocks here) a certain amount of stock at a set price (the strike price) on a specific date. If a company is public and its shares are traded on a stock market, then its stock options are exchanged on that exchange; otherwise, they are not traded at all.

It is possible to hedge (or insure) stock positions with the use of stock options; for example, put options allow you to sell your stocks at a pre-fixed price. Stock options are also a popular investment and speculative vehicle in many Western markets. You can make a ton of money with almost any money out of pocket and almost little risk (you can lose only the amount you put into buying the option).

As a creative tool, stock options allowed shareholders and owners to incentivize employees to work only for the company. Such privileges were traditionally bestowed onto senior managers who were deemed important. All employees eventually started to have similar chances as corporations grew to realize that their staff were their most valuable asset. One kind of employee pay is the incentive stock option program, wherein the employer offers workers the chance to buy business shares at a set price (lower or equal to the market price when the option was granted) over a specified period of time. Even in more traditional European countries, the practice is becoming increasingly common, and the profits from these options now make up the bulk of the salary of the Fortune 500's top managers.

Employees of a company can have the opportunity to purchase shares in the company through an organized program called a stock option plan. In some cases, employers would even match their workers' purchases of shares, meaning that for every share an employee buys, the employer will offer him another share at no cost. This is called a subsidized lending program. There are a lot of corporations that let their employees buy shares at a discount, so they may make a profit right away. (Some companies do it automatically and with no or low brokerage fees) When employees get dividends on their shares, they can reinvest those funds into more shares of the company. A common practice among many businesses is the wage "set-aside" scheme, wherein workers routinely set aside a portion of their salary to buy shares in the company at market pricing. Another popular option is the Employee Stock Ownership Plan (ESOP), which allows workers to gradually build up their shareholdings with the possibility of taking over the company in the long run.

How about we take a close look at a couple of these schemes:

Reagan was the one who started it all. Certain stock options ("qualifying options") were declared tax-free on both the date of grant and the date of exercise under the Economic Recovery Tax Act (ERTA–1981), which his administration enacted in Congress. To qualify for the preferential (lower rate) capital gains tax, shareholders had to hold their shares for at least two years after granting or one year after transferring them to an employee before selling them. Thus, the "Qualifying Stock Option" was born as a brand-new category of stock options. Under American law, an employee could have the opportunity to buy into the company's capital stock at a discounted price through an option, as long as he met certain requirements laid down by the Internal Revenue Code. Shareholder approval of the option plan is required, and options cannot be traded publicly or privately (for a set amount of time) in order to qualify. There are a few additional requirements: first, the exercise price can't be lower than the share market price when the options were issued. Secondly, the grantee, who is the employee who receives the stock options, can't own more than 10% of the voting power of the company. Lastly, the option price can't be higher than 110% of the market price. Lastly, the option can't be exercised more than five years after it was granted. The employee does not have to pay income tax on either the grant or the exercise, when he turns the option into shares that he can sell on the stock market for a profit. It is possible to issue new options with reduced exercise prices if the market price drops below the original option price. The maximum value of stock options that can be exercised in a single calendar year per employee is 100,000 USD.

Employee Stock Ownership Plans (ESOPs) were established as a result of this regulation, which aimed to elevate stock ownership and foster a stronger connection between employees and their businesses. These initiatives provide workers the chance to buy shares in their employer. Workers have the opportunity to have a say in how the business is run. For example, if the company is in dire straits, they are within their rights to assume control. If a company is in danger of going out of business, employees may be willing to negotiate for ownership rights in exchange for wage reductions or other work rule concessions ("marginal facility").

How much and how should a company's shares be distributed to employees?

Except for the fact that the transfer of ownership and control is not required, there are no regulations. Here are a few approaches:



Employees participate in open bidding to purchase varying quantities of share cum options packages from the firm.

For example, all members of senior management have the right to buy the same number of shares. The employees are then free to exchange these shares amongst themselves once the company sells them on an equal basis.

One or more existing shareholders may be granted the authority by the firm to offer their shares to the employees, or to a designated group of employees.



Typically, the firm receives the funds created by the conversion of stock options, which occurs when an employee uses his right to purchase shares. In preparation for the demand that will result from the exercise of all stock options, the corporation puts aside a certain number of shares in its records. To address this demand, the corporation may choose to issue additional shares. Very seldom do other shareholders' stock options turn into their own shares.


Oh my goodness!

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