Stock options: Good or bad for employees??

atabuy

Senior
Oct 13, 2002
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http://yahoo.businessweek.com/bwdaily/dnfl...002118_2199.htm
You wouldn''t expect employee ownership to be a very popular idea around UAL Corp. (UAL ), parent company of United Airlines, these days. After all, the carrier''s workers have seen precious little from their 1994 deal to swap steep concessions for the 55% of the airline they still own in a employee-stock ownership plan (ESOP). With UAL now on the brink of bankruptcy, their stock is trading at around $3, down from a peak of more than $100 in the late 1990s. Nor has a majority control, including two board seats, helped workers to avoid ugly battles with management in recent years.
Yet, United employees actually are asking for more ownership as they struggle to save their jobs. On Nov. 1, pilots stepped up with an additional $2.2 billion worth of cost-cutting concessions as a way to help stave off the airline''s impending financial meltdown. Their offer came with a highly unusual payback provision request: 20 million stock options, worth an additional 12% of UAL''s stock.
If the airline survives, its pilots will get modest wage hikes and profit-sharing over the next six years. But most of their financial return, if one materializes, will come from the increased equity stake union members have demanded. That''s why we built in options: If the company is able to come back at the level we expect it to, we want share in the success, says Steve Derebey, a 767 captain who''s a spokesman for the pilot''s union at United. And that depends on other unions agreeing to $3.6 billion more in concessions if a final deal goes through
DISILLUSIONED. Are the pilots crazy? Not at all. This marks one of the first times workers have asked for stock options in exchange for cutbacks. Usually, employees want hard cash back, or for the more adventuresome, actual stock. But United has discovered that options can offer a lot more advantages for both employees and employers, than ESOPs or other more traditional forms of worker ownership.
Options make another round of concessions at least a little bit easier to swallow because they would allow pilots to realize gains at a younger age while still at the company. Many at United became disillusioned with the 1994 ESOP as they realized that it offered no way to capitalize on the carrier''s success. The airline''s stock soared during the boom years of the late 1990s, but employees couldn''t cash in along with public shareholders unless they retired or quit. That''s because ESOPs are set up to function as retirement plans, and the federal tax breaks they bring require workers to hold their ownership stake until they leave the company.
So employees were frustrated as their soaring stock made them rich on paper but not in reality. The frustration turned to anger and bitterness when United''s shares plummeted and employees couldn''t bail out and cut their losses.
MORE APPEALING. Options, by contrast, can be exercised as soon as they vest, which typically occurs in three or four years. This still would be a long time to wait for United''s 8,600 pilots, who have agreed to cutbacks averaging 18%. However, it''s a much faster payback than they would see if they simply got more ESOP stock. Options also would give employees much more control over their ownership, since they could choose to cash them in anytime after they vest. Options would make concessions more appealing to employees, says Ray Neidl, an airline analyst at Blaylock & Partners.
In addition, if the pilots received stock instead of options right now, they would have to pay taxes on the shares'' value. While those shares aren''t worth much now, no one wants to shell out money when they''re already cutting their paychecks.
Some of United''s other labor groups are starting to think like the pilots. The 20,000 flight attendants, who declined to participate in the 1994 ESOP, know they have little choice this time if they''re going to avoid bankruptcy and more layoffs. They''re saying they want options, too, if they have to take pay cuts.
BEST CHOICE? Only United''s 35,000 machinists aren''t buying so far. They''ve been even more disillusioned with the ESOP than the pilots over the years and remain deeply skeptical of more employee ownership. Still, with many jobs hanging in the balance, they may feel forced to cough up concessions, too. If they do, they''re almost certainly not going to demand more stock.
They''re likely to find that options are their best choice. To avoid a Chapter 11 filing, parent UAL has applied to the federal Air Transportation Stabilization Board for a $1.8 billion loan guarantee. But the board may not agree to demands by the International Association of Machinists for promises of big pay gains if the airline turns around.
If United''s employees do all agree to swap concessions for options, they may not wind up owning all that much more of the company''s stock. The reason: Employee option holders usually sell the stock they get by exercising their options. United workers are even more likely to cash in to get back some of their foregone wages. Of course, United is hurting so badly that worker cutbacks won''t guarantee an escape from bankruptcy, much less a higher stock price over the next few years. Indeed, Neidl and other analysts still think bankruptcy is the likeliest outcome. However, if the airline does pull through, the flexible ownership stake that options provide would allow employees to share in any resurgence of UAL''s fortunes.
Senior Writer Bernstein covers labor from BusinessWeek''s Washington bureau. His new book, In the Company of Owners: The Truth About Stock Options (And Why All Employees Should Have Them), will be published on January 7, 2003, by Basic Books
Edited by Douglas Harbrecht
Getting stock options or buying stock outright or in your 401K will do the same thing for all the employees. You will eventually get your money back and save the company at the same time. Seems to be a win win to me.
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