Jerry Goldstein Breaks Down the Knockout Option

Stock options were once a regular form of an award given by employers to their employees who have excelled at their positions. Today, many corporations around the globe have drastically cut back on providing stock options, normally as a method of cutting costs, but due to the magnitude of many of these corporations, there are often deeper reasonings for this course of action. There are often three major issues that arise within a corporation that would cause them to cancel these benefits. If the value of stock drops significantly, employees with these options may be unable to exercise them. Because the company would still need to report their expenses, stockholders will face a number of new risks, including option overhang. Economic downturns also drastically affect the stock price and could make the options worthless for the employee. Providing stock options to employees can also cause a considerable amount of accounting expenses that may eclipse the known financial advantages. In these cases, employees often prefer a higher salary to taking advantage of stock options.

While there are a few noted disadvantages to providing employees with stock options, there are actually many considerable advantages. Stock options are generally very easy for an employee to understand and take advantage of, while also providing a similar compensation for each employee receiving the benefit. People who are provided with stock options are often more motivated to create new opportunities for the company as a whole, as they only receive real benefits if the value of the stock rises. For employers who insist on providing their employees with stock options, they may want to consider a “knockout” option. Although knockout options follow the same criteria as their conventional counterparts, if the stock price drops below a certain number, the person with them will lose their benefits. Providing knockout options also allows the company to avoid the risk of overhang.

Jerry Goldstein has received degrees from New York University School of Law and the University of Chicago, as well as a B.A. from Cornell University. Today he is a partner at Jerry L. Goldstein and Associates, LLC, where the firm helps to advise CEOs, compensation committees, and some of the worlds most powerful corporations on matters including corporate governance and executive compensation. Prior to founding Jerry L. Goldstein and Associates, Jerry Goldstein was a member of the team at Wachtell, Lipton, Rosen, and Katz, and he has been involved in some of the most prominent corporate transactions of the last ten years.

 

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