"I am an accountant by profession. I have been working mostly in companies in the GCC. But recently I got a job offer that gives me stock options in a medium sized financial services company. I am not very happy about the remuneration this company is offering me as it barely matches the salary I draw from my present employer. The managers of the finance company have told me that stock option is a big bonus for me to join them. Can you please advise as to what are the pros and cons."

This is an interesting scenario that is becoming more prevalent as more companies start to offer these types of benefits to attract, and more importantly keep their employees.

Employers here in Dubai and the Middle East in general are struggling to keep up with the rapid increases in the cost of living, and are not able to simply keep increasing salaries as a way of attracting staff. Indeed various surveys have shown that employees do not just want increases to their salary, but they would like additional benefits that make them feel appreciated by their employer. These benefits can include medical insurance, life cover and pension schemes as featured in last month’s Moneyworks and stock option schemes such as the one being offered with this position.

The theory behind a stock option scheme is that if you are going to ask the most from your employees, they will expect something in return over and above their salary. A plan that rewards employees with a share of the fruits of their labour should draw a connection between work and reward.  When employees are rewarded based on their contributions to the company's success, they feel like owners. As owners, employees have more incentive to increase the company's profitability. However, this strategy will work only if the company and its management create ways for employees to understand the company's challenges and contribute to the solutions. 

Stock options are widely used by young companies in rapidly growing markets. The company gives employees the right to buy shares at a set price during a specified time period. The employee faces no obligation to exercise the option and no financial risk, or actual benefit, until the option has been exercised. The logic behind the scheme is that it should be an incentive to the employees to maximise their efforts to help grow the company and make it more profitable, so their share entitlement will also increase in value, so increasing their overall package.

The advantages to a performance-based type of incentive are that it is flexible and relatively inexpensive to implement for the employer. For the employee it offers the chance to benefit from the company’s growth, and to actually see something in addition to your salary for your hard work, which could be significantly higher than a normal cash bonus.

The main disadvantage of the stock option scheme is that the options can be seen as a less certain benefit than cash. As an employee you have to hope that the company share price increases, and that price can be affected by any number of outside influences that are out of your control.

If you have worked hard all year, but the stock option price was granted at a time when the shares were valued higher than the shares are worth when the option is granted, then there is no point exercising the option to buy the shares, as you will immediately loose money if you wish to then sell the shares. Therefore it would actually cost you money rather than make you anything, so the option is effectively worthless.

Two examples of high profile share option schemes spring to mind. The first was the Microsoft scheme. When Bill Gates was in the early stages of growing Microsoft, he did not have the finances to pay huge salaries, so he offered share options in the company. The share price rose and produced thousands of millionaires within the company as the long standing employees exercised their options.

The other example is Enron, where the staff were heavily incentivised with share options, and encouraged to buy shares within their pension schemes, and then the company collapsed, so the employees unfortunately lost not only their bonuses but their pensions as well.

In summary I would suggest that stock options are viewed as a nice added extra to the package being presented to you and not a major factor in taking the job. The usual factors should be considered first, such as whether you actually like the job, the company and the people that you are going to work for. Only then should the share option package be considered.

As always we at Acuma welcome your questions and enquiries directly so please do not hesitate to contact us if you would like to discuss this or any other issue in more detail.