Offering Employees Stock Options They Can't Refuse

At $33,000 a year, Bob Huxford's pay as a corporate chauffeur for Merck & Co. doesn't put him in the same league as P. Roy Vagelos, the company's $7 million-a-year chief executive. But Huxford feels that a new company program that grants stock options to nearly all employees--not just top managers--will give him one thing in common with the boss. "Everybody will take a little more pride in their jobs if they know they have a stake in the company's results," says Huxford.

Merck's program, announced on Sept. 11, puts it in the growing ranks of companies that want employees to own more of their stock. The trend first developed in the early 1980s, when thousands of employers set up Employee Stock Ownership Plans (ESOPs). Other companies began to use stock-purchase plans, which allow workers to buy company shares, often at favorable rates. More recently, some employers have extended stock-option plans to most employees. Although only a handful of major companies have taken this route so far, experts expect many more to follow suit. "I don't think it's just a fad," says Corey Rosen, executive director of the National Center for Employee Ownership.

Whatever the method used, most employers share a similar goal: to enhance employees' concern for the company's overall performance. As many companies push decision-making down the corporate ladder, they're using stock to encourage employees to think like owners. "We want every individual to feel a higher level of personal responsibility for the company's success," says John W. Himes, human-resources vice-president at Du Pont Co., which set up an option plan in February.

The options twist on employee ownership has been around for some time. Pfizer Inc. has had such a plan since the 1950s. But the idea didn't take off until PepsiCo Inc. unveiled its plan in mid-1989. Others have jumped on the bandwagon since then, including Waste Management, Wendy's International, and Imcera Group.

Each plan tends to have a different wrinkle. For instance, PepsiCo grants new options to employees every year on July 1. Workers then have the right, five years later, to buy stock equal to 10% of their pay. The price stays fixed, so stock that was worth, say, $25 a share last July 1 could be had five years hence for just $25, even if the market price has doubled in the meantime. The employee can sell the shares to pocket the gain, or hold them.

Du Pont, which wanted broad employee involvement more quickly, opted for a one-year waiting period and imposed a cap of 100 shares per employee. Merck also topped its program at 100 shares but, like PepsiCo, imposed a five-year delay for purchases. All these approaches are good deals for employees because they're essentially risk-free. Employees buy nothing until the waiting period ends. If the price is down, they simply don't exercise the option.

'SHAREPOWER.' Options aren't cheap for employers. Either they must buy the stock for employees on the open market or issue new shares, which reduces the proportion of the company owned by existing shareholders. Investors in highly capitalized companies, such as Merck, probably won't blanch at the tiny dilution involved. However, those at thinly capitalized companies could balk. What's more, the programs can be expensive to set up. Du Pont has spent several million dollars mapping out its plans and gearing up to communicate details to 136,000 staffers in 53 countries.

Although some companies brag about options' motivational effect, there are few studies proving the point. Nor is everyone convinced on the subject. Peter Cappelli, a management professor at the Wharton School, points out that most line workers aren't going to say: " `If I had a choice, I would skip out early today, but boy, would it affect the stock price.' " Others say cynical managers could use such programs to defuse attacks on high CEO pay. "The feudal lords would try to keep the attention off themselves by throwing a few crumbs to the serfs," says Joseph R. Blasi, a management professor at Rutgers University.

Such shortcomings seem remote to many Merck employees: Someone who bought $100 worth of Merck shares in 1970 now holds stock worth some $1,750. If Merck's stock does as well in the next five years, Huxford could pocket a $12,875 gain. Little wonder that he, his wife, his son, and two brothers are all among Merck workers who now regularly scan stock tables.


Major companies offering stock-option plans to most employees:


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