What is a substitute for stock options for a family owned company?

Diana S

I work for a medium sized company that is 100% family owned. We are trying to hire high income executives but since we can't offer stock options we are having trouble in our recruitment effort. What are other family owned companies offering their high end employees in the way of "golden handcuffs" besides deferred comp?

Margaret Morford

You can issue them "Phantom Stock" if the concern is that the family doesn't want other people owning a piece of the company or having a shareholders vote in the company. You issue Phantom Stock like stock options on a certain day tied to the current value of the stock. For instance, your stock is worth $5.00 a share on April 1, 2003. You give an incoming executive a 1,000 shares of Phantom Stock. In order to exercise the entire option, they have to stay five years. Usually, they can exercise 25% after two years, 25% after three years, etc. They usually have seven years to exercise. When they exerise, the company simply pays them the difference between the option price and its current worth at the time of the exercise. In the example above, if the stock is worth $8.00 on April 1, 2005, the employee could exercise 250 shares at $3.00 per share and the company would owe them $750. If they chose to not exercise until the absolute last minute (April 1, 2010 - hoping the value will increase each year) and the stock is now worth $15 per share on April 1, 2010, the company owes them $10,000. If the value of the company goes down the options are not worth anything, but if they help drive up the value of the company, they get a share of that added value. You give grants each year to these executives so that over time they have less and less incentive to leave because they have too much Phantom Stock maturing!

Hope that helps. Call me if you want to discuss further.

Margaret Morford
theHRedge
615-371-8200
[email]mmorford@mleesmith.com[/email]
[url]http://www.thehredge.net[/url]

Brad Forrister

Sometimes insurance brokers can come up with some creative options, like whole life "key person" insurance paid for by the company but with a provision that the employee is vested in the cash value on some scheduled basis.

Brad Forrister
Director of Publishing
M. Lee Smith Publishers