02: Effectiveness of share option schemes
In considering the effectiveness of share schemes, both employers and employees need to take into account the following main factors:
- The value of the shares in the company may rise or fall independently of the efforts of the employees – even senior ones. Moreover, general stock market movements can outweigh the particular qualities of the company.
- Share movements may take some time to reflect the real advances that a company has made, and this factor, combined with the general vagaries of equity investment can mean that the time it takes for shares to provide a good return may well be longer than the timescale available to the employee under the share scheme – especially if the employment is terminated prematurely and the options lapse as a result.
- There may not be a very ready market for the shares. With private company shares, this is likely to be the main limitation on their value as an incentive. Unless arrangements have been made to create a special market in the shares among other employees or shareholders, the shares will probably only have a value if the company is sold or floats on the stock market.
- Employee shares issued by the company are not cost free for the other shareholders. Every extra share that is issued will dilute the value of the existing owners’ shares and will have an adverse impact on both their potential capital gains and future dividend income.
- The tax position of the share scheme is very important and can make a very considerable difference to its attractiveness.
