Economic Snapshot | Wages, Incomes, and Wealth

Taking stock of the options

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Snapshot for November 8, 2000

Taking stock of the options
Stock options as a form of employee compensation have become increasingly popular. These options allow the holder to purchase stocks at a fixed price and at a predetermined future date. If the stock appreciates in the meantime, the holder can cash in on the capital gains.

Stock options are already a popular means to promote employee ownership, but the average share of people receiving stock options is relatively low. Only 1.7% of U.S. workers received stock options in 1999. For workers in publicly held companies (firms whose stocks are traded on a stock exchange), the average was 5.3% in 1999.

Stock options varied by income. About 12.9% of all non-executives making more than $75,000 a year had stock options, whereas only 0.7% of those earning less than $35,000 had stock options (see figure below). Among workers at publicly held companies, 26.8% of the high-wage earners, but only 2.2% of those making less than $35,000 a year, had stock options.

Stock option grants by salary

Stock-option grants also differed across industries. About 5.3% of all employees in durable goods producing industries, such as cars or computers, received stock options, and 5.1% of all employees in financial service firms had stock options. In comparison, only 0.2% of employees in non-durable goods producing firms, such as apparel, had stock options, and 0.7% of employees in other services, such as restaurants or hospitals, received stock options (see figure below).

Stock option grants by industry

But the popularity of stock options as a form of employee compensation has created a number of problems. For one, it provides companies with an incentive to use their own resources to push up their stock prices, regardless of the underlying fundamentals. A popular technique is to buy back shares. Since 1994, net equity flows have been consistently negative as companies are retiring more stocks than they are issuing. Second, employees relying on stock options often pin their hopes on capital gains that may never materialize. Stock options are a way of shifting the risk associated with a new venture onto employees, who ultimately have little control over the success of the business.

This week’s Snapshot by EPI Economist Christian E. Weller.

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