Last October, Allan Leighton, former boss of supermarket chain Asda, raised eyebrows by agreeing to become chairman of internet retailer lastminute.com for free. Despite the fact its share price had been tumbling, he spurned a hefty salary in favour of options on a million lastminute shares as a mark of his confidence in the business.
This week, even after predicting its British and French operations would be profitable within a year, lastminute's share price was still languishing at around 50p, making it one of most high-profile casualties of the global collapse in share prices for hi-tech and internet firms. Leighton, who can only make money when the price goes above 137.5p, is still effectively working for free.
With a raft of other directorships to his name, Leighton can well afford to gamble. But for the thousands of others who left safe careers to try their luck in the "new economy" in the hope of making their fortunes through stock options, the downturn in the markets has come as a nasty shock.
Many have been left penniless, ruing their decision to rely on a huge upswing in the stock market for their pay day rather than a regular monthly income.
Max Kantelia, chief executive of recruitment consultancy The McLaren Group, says that, whereas a year ago people were still rushing to snap up internet jobs, today about 25% of his clients are going the other way. "People were being lured away from bricks and mortar based on the promise of a pot of gold at the end of the rainbow. A year later there is a boomerang effect."
Historically, stock or share options have been an incentive given to company directors and top-level employees to promote loyalty and commitment. An employee is given the option to buy shares at a fixed price, or at a level below the current share price. A time limit is set within which the option can be exercised or cashed in, often a period of years.
For example, a company with a share price of, say, 500p might offer an option on 10,000 shares at 300p exercisable over a three-year period. If the employee cashed in his chips straight away, buying the shares at the option price - for £30,000 - and selling immediately, he would make £50,000. But by offering a stake in the company, the incentive is to work to boost the share price and over time rake in an even greater cash return.
This top-level gravy train changed during the late 1990s, when pioneers such as Microsoft and Amazon began offering everyone from secretaries upwards the dream of making millions from stock options on markets that seemed unable to go down. Investment banks, dot.com start-ups, telecom, technology and software businesses in particular all started to go down the stock option route.
One of the main reasons for doing this, especially for dot.coms, was because they needed to preserve cash. Share options, unlike salaries, do not show up on the balance sheet and so firms were able to hire people on cut-price salaries, sometimes as much as 80% less, but with lucrative stock option packages. Options were also used as a kind of invisible currency to pay suppliers or consultancy firms, again to save cash.
But when share prices slumped, staff were left sitting on stock options that had become effectively worthless because their exer cise value was higher than the share price. Other firms proposing to float simply scrapped or delayed their plans, dashing their employees' hopes of making a quick buck.
But while the dot.com boom may be long gone, the taste for ownership it has given many employees is showing no signs of abating, even if the risks are greater.
Vicky Wright, managing director of remuneration specialist Hay Group, believes the granting of stock options on a wide scale during the boom will have reverberations in the labour market for some time to come. Employees, she argues, are now increasingly expecting to take - and be offered - some sort of stake in the company they join, even if this means sharing the pain when times are bad.
"The dot.com boom last year really shook up the labour market. There has been a significant change, which will continue, in the expectations of young professionals to have some skin in the game. By encouraging people to take a stake in a company they are encouraging them to engage in the business," she says.
Dot.coms and others that offer options are also adamant they will remain an important incentive in the workplace. At internet service provider Freeserve, for instance, staff are offered at least the equivalent of their annual salary in share options as an incentive - the only difference being they are now not Freeserve shares but those of Wanadoo, the French rival that swallowed it up earlier this year.
And software firm Misys, which offers options to about 9% of its 6,000 staff, says the downturn in the markets has not changed how it views their use. If anything it has been offering options worth higher multiples of salary, to keep the incentive element even if the risks are greater.
One change that has happened is that the downturn in the markets has led to a more realistic outlook about what it is reasonable to accept. Basic salary and potential bonuses are figuring much more highly in job negotiations, argues Kantelia.
"Stock options are still an attraction but they are the icing on the cake. I'd suggest that the budgets being put aside for basic salary levels are much higher than a year ago. It is very much 'show me the money up front'. People are just not willing to have the jam tomorrow," he concludes.
Fingers have been burnt by the bursting of the dot.com bubble, and the warning that shares may go down as well as up is finally being heeded. But for many, particularly those prepared to take a risk and look to the long term, it's much too soon to sound the death knell of the stock option.
...but not for everyone, though
Share options that land you with a huge bill rather than the promised payouts? In the US, some staff at Microsoft are having to cough up large amounts for paper gains in previous years, even though their shares have fallen steeply in value.
Microsoft share options turned hundreds of middle ranking US staff into millionaires when the dot.com boom reached its pitch in March last year. Then the taxman cast his eye over the gains made on shares and slapped a bill on each option. The tax is payable on the paper gain even if staff hang on to their shares.
Given that the shares had almost doubled to over $120, the tax bill was huge. Traditionally, the recipients of share options in the US sell a few each year to pay their annual tax bill.
The next month, when the dot.com bubble burst, Microsoft shares plummeted to just over $40. For many employees this figure was lower than the price the company set when it handed out the options. They were sitting on a loss. But the tax bill still stood.
More than 25 staff have reportedly filed for bankruptcy. Larry Feinstein, a partner at the Seattle law firm Vortman & Feinstein, says he represented five of the staff, one of whom owed $125,000 in unpaid tax.
"Some of the Microsoft employees have a very large number of stock options and when the crash came it hit them very hard."
In the UK, the Inland Revenue is prevented from assessing stock options each year. A gain on options that are not part of a government approved share scheme, which accounts for most dot.com options, are assessed for tax when they mature (after three to five years usually).
But that doesn't mean things can't go wrong. If the dot.comer realises a gain and the day afterwards the share price falls to below the issue price then he or she is in the same boat as the Microsoft worker. Unlikely, but still possible.
As John Whiting, a tax expert at PricewaterhouseCoopers, says: "Share options are not a guaranteed no lose situation."
Phillip Inman
I see them simply as a perk
For Angela Williams, human resources director at online auction house QXL, stock options are a perk, no more, no less, and were certainly not her main reason for joining the company in March last year from US giant Disney. "I do not know how much my stock options are worth, to be honest," she admits.
The attraction of joining a small, young organisation, and being given the remit to build up a human resources department from scratch were much greater incentives, she says.
"People would be blind if they were not aware of the way the markets are going and that there is huge pressure on share prices at the moment.
"But the stock price does not determine whether people stay here or not. Because we are a relatively young workforce, people feel they are contributing, they feel they have autonomy and the ability to influence. The share price and the share allocation are generally not the only reason people come or go," she argues.
Every permanent employee at QXL gets offered options based on their salary level, which are reviewed annually, although there is no rigid formula for calculating exactly how many options are granted.
"They are nice to have and, yes, we would all love to be millionaires, but it is still the content of the job that attracts people. But there is no denying stock options have to be in the package," she adds.
QXL shares were trading this week at around 10p compared with a high of 744p last year.
I see them building a team
Last May, after working in the City for 14 years, investment banker Nigel Walder took a 75% pay cut to go and work for an e-commerce start-up preparing to float on the US Nasdaq exchange.
"The cash compensation was certainly not of the order of magnitude that I had been receiving at the bank. The whole compensation scheme was focused around stock options," he says.
But with the markets in freefall, and the e-commerce company yet to float despite securing second round funding, he decided to forego the potential earnings of his options and leave to set up a technology consulting firm called The Buttonwood Tree Group.
Nevertheless, he does not regret his decision. "If I had joined purely for financial reasons, I would have been barking mad," he admits. "I went from a massive corporate culture to a small company and I found that very enjoyable. Once you open pandora's box, you get a taste for the entrepreneurial flair," he explains.
"The whole stock option issue has been clouded by the dot.com burst. It is just that so many dot.coms had such weak business models and that has been found out. Unfortunately, those companies that are smart are really struggling because of that, they have been caught in the tidal wave."
Despite this, Walder believes stock options have their part to play and now, ironically, finds himself offering his employees options as an incentive. "Stock options are a really nice, smart way to incentivise people," he says.
