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Foreign Exchange

Employee stock options: A new incentive option

There’s been a fair amount written about how companies, especially financials, are struggling to recruit talent because of their declining stock market valuations. In particular, the award of longer-dated call options and non-vested stock is currently seen as worthless and potentially demotivating. After all, most market participants have seen the value of their pension pots completely mullered this year as a result of the decline in bank and hedge fund valuations.

We all know the logic behind stock options. However, back in the old days, I used to joke that the only employee stock options I wanted were puts. This possibly reflects either the calibre of the institutions I worked at or my prowess at dealing. Obviously, puts will never be granted as employee stock options – it would encourage stupidity and risk-taking of the magnitude seen in credit derivatives – but there is an obvious solution. Companies should allow staff to hedge their portfolios if they want to – in other words they should be allowed to manage their own personal risk as much as the company’s they work for. It would help to restore motivation.

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