Grip of golden handcuffs firm despite market drop

Guest Opinion

When it comes to retaining key employees, rarely has a corporate tool achieved the kind of attention and celebrity that stock options have in recent years.

What was once a poorly understood form of compensation has become the subject of coffeehouse chatter, newspaper copy and stand-up comedian routines seemingly overnight. Though still granted mostly to high-tech employees, stock options had won a place in the common consciousness by early 2000.

SPONSORED CONTENT

Federal District Court Rules Corporate Transparency Act Unconstitutional . . . But Most Small Businesses Must Still Comply

Lyons Gaddis Real Estate and Business Attorney Cameron Grant shares important details of the Corporate Transparency Act (CTA).

Now, as scores of companies face the impact of a declining stock market, the role of options as effective retention tools has been called into question. High-tech firms have placed significant emphasis on their stock-option programs, believing them to hold an answer to their employee retention woes. In fact, the primary objective of option-grant programs is employee retention, according to iQuantic’s “High-Tech Equity Practices” survey of more than 200 companies that grant options.

At this point, the question is whether or not options are still able to retain employees. In other words, do stock options still hold value for employees and for the companies that grant them? The answer seems to be yes.

Those employees who have for the past several years been granted options continue to want those options, and companies continue to grant them. Stock options are still considered a competitive necessity in the high-tech arena. Even those companies with substantial grants underwater are not abandoning stock options.

According to a recent iQuantic survey of 100 companies (about 80 percent of which had a significant percentage of grants underwater), most companies, about 80 percent, said they would not change their compensation philosophy toward using options as a form of compensation; however, the market decline of the past several months underscores the need to view retention as multi-faceted issue, which no single response can adequately address.

While retaining employees might be the primary objective of a company’s stock-option program, and while most believe that stock options continue to provide value as retention tools, there is nothing to suggest that stock options are the only ? or even primary ? reason why employees remain with a company.

There is no standard approach to developing a retention program because every company has different needs, and so does every individual covered by the retention plan. In this context, a retention plan is defined as an approach to keeping employees during a specific time period, perhaps after a significant loss of market value. Retention programs that are targeted, simple, well communicated and not overly frugal are the most successful.

While each program should be tailored to address the company’s unique objectives, every program should consider the following seven key design factors:

* Identify critical employees. Identify employees who are important to the success of the business and whose continued employment is at risk. It is as important to identify critical people as it is to identify critical jobs.

* Set conditions for bonuses. It is important to protect the company’s investment but without creating barriers to participation.

* Determine appropriate payouts. The greater an employee’s impact, the higher the retention award should be. Payouts typically range from 10 percent to 50 percent of an employee’s salary but may be as high as 300 percent.

* Determine how to pay the award. The standard approach is to pay a cash bonus at the end of the retention period, but the award may also be in the form of company stock or stock options. Other potential retention awards include special trips, gifts such as personal computers, or opportunities for personal time. Sometimes employers elect to delay payment of retention awards. In doing so, two factors ? the amount and how the award is packaged ? should be considered. Behavior research shows that the longer a reward is delayed, the larger it must be to have a meaningful impact.

* Establish qualifiers or modifiers. For some companies, retaining employees through a specific date is important. In other cases, performance is key, and the award is modified based on pre-determined milestones such as revenues from key accounts. Be careful to design programs that encourage desired performance.

* Determine the impact on other programs. In most cases, retention programs supplement performance pay programs. Substituting retention programs for performance programs may backfire by creating employee resentment. Be careful not to be too frugal or to make a program so complicated its positive impact is compromised.

* Identify other options. Money is, of course, not the only factor for motivating employees to stay put. Companies with low turnover rates typically encourage high levels of involvement, are highly flexible, create numerous reward opportunities and are responsive to employees’ personal needs. Other options that help include providing flexible work hours, using special projects or assignments to motivate employees, creating mentoring programs, and supporting training that contributes to employees’ abilities to add value to the company.

Communication is crucial to the success of any program design. The approach to employee retention should be similar in many ways to a customer retention or customer service program. Common sense dictates that employees, like customers, want to be treated well and want their employers to respond to their needs. Jim Fredericks is a principal in iQuantic’s Denver office. He can be reached at (720) 963-1700.