Myth #1: Most People Getting Options Worked for Dot-Coms

One of the most prevalent and misleading misperceptions was (and still is) that most employees getting options work (or now worked) for dot-com companies, most of whom were small, pre-IPO ventures. This was never even close to true. There were a lot of dot-coms, to be sure, and most of them did give most or all their employees options, but most also employed well under 100 people. The total employment at all the pre-IPO dot-com companies never amounted to more than a few percent of the 10 million people getting options. In fact, almost all the employees getting options work (and worked) for publicly traded companies, and most of these work for large employers. Verizon, for instance, makes most of its over 200,000 employees eligible for options. It would take 5,000 dot-coms with 40 employees each to have that many employees.

Myth 2: OK, Well at Least They Worked for High-Technology Companies

The large majority of high-technology companies do make most of their employees eligible for stock options, but even the highest estimates for the technology sector place employment at about five million. If 60% of these get options (a reasonable guess), then only three million employees getting options are technology workers. In fact, about 15% to 20% of all public companies give employees options, and many of these are outside the technology sector. Many large banks provide broad options, for instance, as do a number of large pharmaceutical companies. Retailers like Whole Foods, Walgreens, and Starbucks give out broad options. So do PepsiCo and Procter & Gamble.

Myth #3: Most People Give Up Pay to Get Options

Economists tell us there is no free lunch, so if someone gets options they must be giving up pay or benefits. To be sure, some employees have done just that. There are lots of people who were lured to start-up companies at lower salaries in return for substantial option packages. But these people are the exceptions. For the most part, they are at the managerial level or higher, or people with special skills, such as programmers. Altogether, they comprise only a tiny portion of all the employees getting options. Data from Professors Joseph Blasi and Douglas Kruse at Rutgers University indicate that, overall, employees getting options are paid about seven percent more in wages than comparable employees in comparable companies that do not give out options. The fact is that with a tight labor market – and we still have a labor market that is tighter than historical standards – it is very difficult to lure all but a handful of risk-takers to jobs whose base pay and benefits are not comparable to what could be earned elsewhere. Options are gravy to help companies distinguish themselves. In the tech sector, they are not even that – everyone gives out options widely, so they are just part of the ante to the game.

Myth #4: Options Are Only Worthwhile if Your Company is Publicly Traded

Many stories advised employees that if their company was not on a public stock market, their options were worthless and would be until the company did an IPO – which very few ever would do. In fact, most closely held companies giving out options are sold (assuming they don’t close first), at which time the options are usually exchanged for cash or for stock in the acquiring company at the sale price.

Myth #5: Options Are the Last Decade’s Compensation

Surely, this myth goes, no one wants options any more. Lots of employees have lots of options deeply "underwater," meaning the price at which the employee can buy shares is way above the current price, making the option probably worthless. So who wants more? Employees do, and employers want them to have them. Data from the National Center for Employee Ownership show that most companies with broad-based stock options plans have no plans to change, much less eliminate them. Most of these companies now dole out the options over a period of years, rather than all at once. So employees got some options at a very high price, but will get some more at what seems like a very low one. These new options could be worth a lot one day. Moreover, many employees have options in companies that have been more stable, and their options either are still worth something, or are close to that point.

To be sure, people and companies are now more realistic about what options can mean. They are probably not going to make more than a handful of people rich, but, for most option holders, they provide a worthwhile additional benefit. And for most option granting companies, they provide a way to link employee and corporate fortunes for the long term. Options are not the ready path to riches they may have seemed to some, nor the magic elixir for corporate recruitment, retention and motivation problems they seemed to others, but they have too many advantages to both sides to go the way of hula hoops and pet rocks.