Stock Options as a salary component?

[gekkoplus]

What's the usual practice of structuring salary (base salary and stock options) for a job? I am interested in knowing what % of salary should options be? I don't seem to find a good baseline in order to open up any negotiation talks on a new job offer.

I have been offered 1000 stock options over a fixed base salary on a new job, and I was wondering how to evaluate whether 1000 stock options is a fair or less-than-fair number. In case if I ask them to increase my stock options to let's say 2000, how much base salary should I be willing to forego?

I understand that value of options depend upon growth potential of the stock. But I could find any standard valuation technique to quantify "growth potential" of a stock and determine any reliable projected value of options after the options vest.

[Snave]

I can't give you a percent to ask for or what is best. However, I can say that when I left the last company I was with I had thousands of shares of stock options. This was a very well known company and one that is considered a leader in their field. However, the company stock had not done anything in the last 8 years. I had over 600K in stock options that were worth about 2k when I left. How much money would you be willing to give up in base salary for 2K worth of options after they are vested? If you don't think it can happen to you, think again. The company I was with was averaging about 14% for it's life and just took a bad turn. There is little risk on their part to put your compensation in to stock.

[jIM_Ohio]

I would not give up any salary for more options unless I had cash in the bank or was offered a job as CEO. It is pure speculation- don't give up more- too much risk and not a high enough reward.

Stock options would also be an AMT trigger. More risks without a large reward. Don't mess with earning power.

[gekkoplus]

Another interesting thought that came to my mind I am breathing it out here.. Let's say current stock price (and exercise price) is $500 and I get 1000 stock options. In this case every 1% increase in stock price means $5 which translates into $5000 value of options.


In another scenario, suppose current stock price (and exercise price) is $1 and I get same number of stock options. In this case every 1% increase in stock price means $0.01 increase in stock price which translates into $10 value of options.

Getting my drift here? Value of options is completely dependent on how high/low current stock price is. For a google employee, 1000 options would mean a lot compared with same number of options for a Charter Cable ($1) employee. In this case Charter Cable guy should be demanding equivalent number of options that would bring him at par with a Google employee at least at the start of the job.

So I guess I am looking for that multiplier I can use in my current case to bring my number of options at par with employees at other companies.

[Broken Arrow]

Well, there are a couple of scenarios to the nature of stock options. All of them favor the company, and if the options are sold to you at an agreed discount price, then it favors you too.

Either way, I think the basic advice is still the same: Don't sit on too much of your own company stock!

I would set up a system of regularly selling some or perhaps most of your company stock and re-diversify the proceeds back into a proper portfolio. How much stock you keep depends on how comfortable you are with it, and what level of position you hold.

Otherwise, the general rule is not to hold more than 5% of your own company stock versus your overall portfolio, but if you are higher up, you may be forced to hold more than that. Depends on your contract.

This is just my personal opinion, but if given a choice between more pay or stock options, I lean towards more pay.

(By the way, who do you work for that costs $500 per share? Google? Still, the volatility of the stock or the stock price itself still doesn't change my recommendation.)

[LivingAlmostLarge]

Options I never count. But restricted stock, like my DH's signing bonus was 3 year restricted stock grant of $50k then, more now, I'll count when we get it.

But we get the stock period, no paying for it. And I don't even count it until it vests.

[gekkoplus]

I too was "options averse" until recent days. My previous company, a private start-up, had offered me a large number of stock options that would reduce a big chunk of my salary. At that time, I was completely new to the options world, and I chose a fixed base salary over options.

Just after one and half year or so, this company was bought out and I heard that many of my colleagues made a fortune overnight. That somewhat jolted me and made me a little more open to at least investigate the opportunity.

I am not a great fan of hit and miss, but I do now realize that one hit can potentially compensate for thousand misses.

[Broken Arrow]

Originally Posted by gekkoplus

I too was "options averse" until recent days. My previous company, a private start-up, had offered me a large number of stock options that would reduce a big chunk of my salary. At that time, I was completely new to the options world, and I chose a fixed base salary over options.

Just after one and half year or so, this company was bought out and I heard that many of my colleagues made a fortune overnight. That somewhat jolted me and made me a little more open to at least investigate the opportunity.

I am not a great fan of hit and miss, but I do now realize that one hit can potentially compensate for thousand misses.

Yes, but without knowing the specifics of the company you work for, isn't it just as possible for the opposite to be true, and your colleagues could have lost a fortune overnight? Enron is the classic nightmare scenario.

I don't think stock options is necessarily a bad thing either. We had someone who asked about it for Novo Nordisk a little while back, and I made the uncharacteristic recommendation of 10% (instead of the usual 5%). However, I do think that having too much into any one stock could set your entire portfolio off-kilter... unless that is exactly what the person wanted to do.

But that's just me.

[Scanner]

Enron

[QueenOphelia]

Plus don't forget the tax bill for options and stock grants. I pay more than 50% whenever I sell some of my Restricted Stock Units.

I would never swap options for base pay. Perhaps you can negotiate options as part of a bonus situation.

[jIM_Ohio]

Risk and reward. Those which take the biggest risks will get the biggest rewards.

The question is are you willing to put that much risk in where you work. Every situation is different, but I am of the opinion that if a person is saving enough (10-15% of income) and has enough in their budget to live on (based on salary component) then getting stock options, participating in a company stock purchase plan, or dabbling in individual stocks is a good thing. It can significantly boost returns relative to the rest of portfolio.

I am always shocked at the people here which always recomend to avoid stocks, avoid company stock, or sell a holding simply because it does not suit their own risk tolerance.

Never let anyone tell you how much risk you should be comfortable taking.

[Broken Arrow]

Originally Posted by jIM_Ohio

I am always shocked at the people here which always recomend to avoid stocks, avoid company stock, or sell a holding simply because it does not suit their own risk tolerance.

I suppose that's me.

To be sure, I agree that risk tolerance is a factor that individual investors have to determine for themselves. But it's not the only factor to consider. (And for the record, I don't project my own risk tolerance towards others.... Though technically, if I did, everyone would be stock trading. )

Other factors include the individual's skill level and willingness to put forth the time and effort for such endeavors. To me, stock picking and trading is fairly deep end stuff. Even if it's not day trading, it really helps to have the basics down pat first, your financial house in order, and to approach it incrementally from a properly-allocated and diversified portfolio first.

So, when people ask questions like, "Should I buy or sell this?", it gives me the impression that they don't have their basics down pat. Because, if they do, then they wouldn't have to ask such a question. Better yet, they would also realize that such a question is one of those trick questions with no good answers. Because it "Just Depends" relative to their portfolio, risk tolerance, and investment style.

In fact, I don't think what to pick is even anywhere near as important as how to pick it!

So, that's why I end up constantly advising to avoid stock picking....

Now, if someone were to come up and ask, "What are the conditions that would be appropriate for someone to be stock trading?" then I would have responded differently. Rather than simply saying, "Don't do it", we could go into details about the circumstances that I think would be appropriate to do so. But no one has yet to ask that kind of question.