Are We Out of Options?

They were the currency of the American dream. Now they are worthless paper — a symbol of CEO greed. What went wrong with stock options? Where do companies go from here? Our only option: Visit one of the world’s leading authorities on employee ownership.

The promise was irresistible: Share the wealth from entrepreneurial creativity throughout the company rather than restrict it to a few founders. The impact was undeniable: thousands of stock-option millionaires at Microsoft and Oracle, with millions more hoping that they too could cash in. The reckoning was painful: a plummeting stock market, self-dealing CEOs — the end of a new American dream.


The dizzying rise and fall of the stock-option culture was even more pronounced than the rise and fall of the stock market itself. The most potent expression of grassroots risk taking — “I don’t need a big salary, give me options” — feels about as relevant today as winning a foosball tournament. All of which creates a challenge: how to maintain the spirit of enterprise, share wealth among the people who create it, and align the interests of shareholders with the people who do the work.

For Joseph Blasi, it’s the challenge of a professional lifetime. Blasi, a sociologist at Rutgers School of Management and Labor Relations, is more than just one of the world’s leading experts on employee ownership. He is also an evangelist for the concept. He has researched employee-owned companies in the Basque region of Spain, kibbutzim in Israel in the early 1970s, and cooperatives in Russia, as well as the stock-option capitalism pioneered in the United States during the past 10 years.

Now, just when faith in the virtue of stock options is at a low point, Blasi (with Rutgers colleague Douglas Kruse and Business Week senior writer Aaron Bernstein) has written In the Company of Owners: The Truth About Stock Options (and Why You Should Have Them) (Basic Books, 2003). Here’s some straight talk about a sore subject.

What’s the simple explanation of what went wrong with options?

Too many options went to too few people. Our calculations show that the top five executives at the 1,500 largest U.S. companies got $18.3 billion in stock-option profits in 2000, up more than fivefold from the early 1990s. Over the course of the decade, those executives made a collective $58 billion. Today, CEOs and a thin layer of executives in corporate America own a total of 12 billion options, giving them control over about 11% of all outstanding public shares. They hijacked what could be one of the most important innovations in decades.

But you know the argument: “In order for companies to perform, we have to keep the people at the top motivated . . .”


Actually, in our analysis, the companies that awarded top executives the highest percentages of total available options did worse in terms of shareholder return than the companies that offered more options to rank-and-file managers. We ranked 1,500 companies based on what percentage of all options went to the top five executives. The 375 firms that gave the most options just to the top five people registered a 22.5% average return to shareholders. The 375 companies that gave the fewest options to the top five executives (and more to everyone else) registered an average 31.3% return to investors.

Building shareholder value is more complex than the actions of a narrow group of executives. In companies that depend on knowledge capital, a broader band of employees are responsible for creating value.

So Silicon Valley should still be booming. Those companies did not limit options to the top people.

It’s no accident that technology companies, whose success is so tied to human capital, have pioneered broad employee ownership. We looked at 100 high-technology companies, such as Cisco and Yahoo. If you had exercised all of the options, the average employee shareholding in those firms was almost 20%. It’s the most meaningful system of employee wealth sharing ever developed in any modern economy.

But in the bust that took place after March 2000, many of those companies did poorly. Many employees lost a lot of paper wealth. Broad-based ownership doesn’t insulate a company from a marketwide slump. These companies didn’t do everything right. But I don’t think that should be used as an argument against options.

So more companies should emulate Silicon Valley, despite all of the setbacks?


We think so. A lot of big companies have experimented with stock ownership, but many of them have done it the wrong way. They have extended the least risky ownership stake — options — to those who can afford to take on the most risk: the highest-income people at the top. Yet they have given the riskiest stake — direct stock ownership locked up in long-term retirement plans — to average workers, who can least afford to gamble their savings on one stock. The technology companies have figured out a way to include professional, mid-level, and lower-level employees in sharing the company’s fruits of success.

You make it sound easy.

No, it isn’t. There are three complications. First, broad employee ownership works only when it’s combined with an entrepreneurial, participatory workplace.

Second, plans have to offer employees significant incentives relative to their fixed wage. In a demanding work environment, an employee-ownership program should yield at least a 15% increase in wealth per year above wages.

Third, companies have to cut what’s given to top executives in favor of the lower ranks. There’s no formula for this, but generally, I’m suggesting what technology execs have long known: It’s better to own a small percent of a growing asset than a big percent of a stuck asset.

Senior editor Keith H. Hammonds ( is based in New York. Contact Joseph Blasi ( by email.