Do restricted stock grants motivate workers?

Posted: Friday, July 11, 2003

NEW YORK (AP) Stock options got a bad rap for motivating employees in all the wrong ways. Restricted stock carries the danger of not motivating them at all.

With restricted stock, companies compensate workers particularly top management by awarding them shares outright with some payout promised regardless of what happens to the company's share price.

But those that give out stock without tying it to any performance measures are essentially handing out shares to workers just for showing up. It may be hard to find much benefit in that.

''It's like being a potted plant,'' said Joseph Blasi, co-author of ''In the Company of Owners: The Truth About Stock Options'' and a professor at Rutgers University School of Management and Labor Relations. ''You get shares, and as long as you are there when they vest, you walk away with money.''

More companies are compensating with restricted stock rather than relying on options. Microsoft made headlines this week when it announced it would start doing that later this year for all its employees.

This shift in corporate America isn't so surprising, given the controversy around options lately.

For one, options a right to buy shares at a fixed price in the future have been blamed for giving employees incentive to manipulate earnings to inflate the stock price. That was a key issue in many of the business scandals over the last few years.

There is also intense debate over whether companies should be required to deduct the cost of the options from earnings. And lastly, employees are unhappy because their options are essentially worthless after three years of steep stock market declines.

All that is making restricted stock more attractive right now to both companies and workers.

''When options go well underwater, employees get very disgruntled,'' said Bill Coleman, senior vice president for compensation at ''With restricted stock, it almost never goes to zero. Employees always have some ownership level at all times.''

Think of it like this: An employee is granted 1,000 shares of restricted stock at $20 each. If the stock doubles after the shares vest, or gain ownership, the employee makes $40,000 before taxes. If the stock drops to $15, the employee still walks away with $15,000.

If the same employee had been granted 1,000 options at $20, they only make money if the stock price rises. So if it doubles, the employee could make $40,000 before taxes. But if it falls, the shares have no value because the employee won't want to pay $20 for shares selling for $10.

A new survey of mostly public companies by Mercer Human Resource Consulting found that more than half of 134 respondents began using equity compensation this year that they had not used or rarely used before. A majority of that was restricted stock.

The problem comes in how they are allocating those shares.

Only 14 percent are awarding stock based on performance, such as sales and profits. Sixty-three percent are offering stock on a tenure basis, so employees only have to wait a certain time before they can cash in.

Microsoft is doing a mix of both. Its employees get stock when they join the company that vests over five years. They also are entitled to accrue shares based on performance as evaluated in their annual reviews. Company growth and customer satisfaction will also be factored into awards for the top 600 executives.

Compensation experts favor the performance-linked awards and call the time-lapsed grants ''pay for pulse'' or ''pay for stay.'' That's because they do little to keep employees driven since they know they will get some payout as long as they don't get fired before the shares vest.

Of course, they would have more to gain should the shares increase in price. But for some employees, it's enough just to know they get some money no matter what.

That's complacency. Companies want commitment. If restricted stock is to be the carrot, there has to be a stick, too. Employees have to earn it.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)

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