Have Stock Options Lost All Their Appeal?

Should you consider taking Stock Options as part of a compensation plan? Until now, that's been largely an academic question. Internet companies of all types have used buoyant stock -- and the prospect of even bigger payoffs -- to recruit employees, make acquisitions, even pay lawyers, landlords and electricians.

Now, quickly dropping share prices are putting this business model to the test. As the prospect of a stock market in free fall becomes all too real, Internet darlings are finding they have to pay employees more, treat them better, grovel for support services and, most of all, lay out a convincing path toward profitability.

Companies realize they must start attracting and keeping talent with lures other than surefire stock-option gains -- a task made particularly hard for Web retailers by the recent fall from grace. To snare Chief Executive Frank Newman, for example, San Francisco online pharmacy More.com Inc. offered a $500,000 salary, a guaranteed bonus of $250,000, a $500,000 relocation package, as well as a $1 million signing bonus in restricted stock and stock options valued at 5% of the company.

Plunging stock values are making it harder for Internet companies to retain employees too. Silicon Valley workers often monitor the company stock price obsessively and are quick to flee when share prices stagnate or fall. "People are very focused on the upside of the stock, on quick wins," says Janice Roberts, senior vice president of 3Com Corp., a maker of computer-networking equipment that struggled to recruit and retain employees after its stock lost half its value early last year.

Some companies may consider reissuing stock options at a lower price. The strategy can help keep employees, but it also can hurt earnings and anger investors. "It's not fun and not easy to reset your option strike price," says Marc Bruneau, president of the consulting firm Renaissance Strategy Worldwide Inc., in Boston.

Even when support is available, it's likely to be more expensive. Lawyers, ad agencies, PR firms and headhunters have accepted -- in some cases demanded -- stock as payment for their services in recent years. Mr. Holman, the recruiter, says he will still take stock in start-ups but will demand more shares -- or more cash.

An Internet shakeout will affect these supporting industries as well. Internet companies spent $3 billion on advertising last year, to uncertain effect, and many companies are now cutting back. In particular, newcomers formed to take advantage of the Internet boom may suffer.

Are option always a lousy deal? Of course not, many young guns are quite wealthy now thanks to shrewd selling of company stock. Realize also many companies brightest stock days may still lie well in the future. Negotiating now with, at least, a partial openness to accepting stock options may separate you from other candidates and pay off richly