Beware the downside of share options

The lure of new media has tempted high earners to accept pay cuts. But are they taking a stake in an uncertain future?
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The Independent Online

Highly skilled IT professionals are being warned against underselling themselves in their enthusiasm to be part of the new media explosion. Signs that the stock market's love-affair with such firms may be waning has focused attention on the pitfalls of using share options or profit- sharing packages to lure staff.

Highly skilled IT professionals are being warned against underselling themselves in their enthusiasm to be part of the new media explosion. Signs that the stock market's love-affair with such firms may be waning has focused attention on the pitfalls of using share options or profit- sharing packages to lure staff.

Instead of paying up-front for the skills needed to fuel the new media explosion, start-ups, inspired by the flotation of, among others, FreeServe and Computacenter, have been using shares, or the promise of a profit share, to woo Web programmers and developers away from high salaries.

Marese Conaty, a director of new media at the IT recruitment specialist Price Jamieson, claims that demand for the programming skills needed, eg in HTML and Javascript, is outstripping supply.

One industry source said that fledgeling firms needed to come up with ways of rewarding employees who risk high salaries to join the industry. Share options are familiar to many employees in the form of Save As You Earn (SAYE), a savings scheme whereby employees put aside their own money each month to buy reduced-price shares at a fixed future date if they so decide.

The employee is then left with an option to buy, or can take the money plus interest if the share price is no longer an attractive bet.

However, the share options being offered to IT executives often lock in employees because they are offered as part of a remuneration package, rather than an optional extra.

The danger, claims another senior industry figure - who also does not want to be named - is that employees are being duped into leaving a high- salary job for a mediocre one. He says: "I am not sure that many people will really understand what share options are about. One of my colleagues on 50,000 was offered a £40,000 salary with £30,000 of share options. Now, if the value of those shares goes down when it comes to his having to buy them in the next five years, even by a penny, he's taken the pay cut for nothing.

"At present such schemes look appealing. New media companies have been doing so well - everyone thinks they're on to a winner. But you only have to look at the Nasdaq index - Amazon shares have fluctuated from from $60 to $200 each. If you end up having to buy your shares in the wrong year, then you are stuffed."

But be employed by the right firm, and you are on to a winner, believes Richard Holway, chief analyst and managing director of Richard Holway Associates. "Look at the grandaddy of them all, Microsoft. By far the largest single form of remuneration there has been through share options." He believes that the employee simply cannot lose.

"Some share option schemes involve the employee's putting aside a set amount of money a month, but when firms want to woo in top execs they offer share options on top."

Holway adds: "Many people in computer firms have made an absolute fortune." However, share price fluctuation must be built into people's expectations, he stresses. Share options are very much a long-term bet, which is why they are dubbed "golden handcuffs".

Holway's comments are borne out by Computacenter, which floated on the London Stock Exchange in May 1998. It nestles in the FTSE top 200 - making it an OK bet as far as shares go - but in the last 12 months it has veered between 377p and 650p. The Internet biggie Freeserve is another; its shares peaked at £2.40, but last week were at £1.50.

Computacenter's company secretary, Alan Pottinger, believes offering share options to executive staff ensures that the firm keeps its skilled and most talented individuals."We offer share options, as they encourage entrepreneurial skills.

Computacenter's ethos is based on making sure that IT firms that grow from an entrepreneurial background don't lose their original dynamism. Share options are one way of feeding that original hunger. It also rewards hard-working employees who helped the firm make it there in the first place. "Then the van-driver holding options has a vested interest in making sure he or she offers the best service possible. It builds performance criteria into the job and gives everyone a stake in the firm," says Pottinger.

But while Microsoft professionals who did not take share options may well be kicking themselves, some of those in fledgeling new media companies that barely got off the ground may think otherwise.

Nigel Kinnison, from Hertfordshire, worked for an east London firm developing software to enable Internet access via cable TV. "I was offered a profit share, so should my company ever have been listed I had the promise of shares. I took this as part of the package, so I took a lower salary." However, the risk did not pay off; last December the firm went bust, owing £500,000."

Richard O'Brien, a spokesman at the Manufacturing Science and Finance Union, says those going into the schemes had to be well informed. "Share options are fairly common in this industry. As we come up to the new millennium there will be a squeeze in the Internet business. We expect many of these new media firms to see their value level off.

"There is potential, but there is a risk. Our advice would always be to take the money and negotiate. I can't imagine that people will take an unrealistic cut in their salary to gamble on the stock market. If they are not aware of this when they accept the options, then it's a bit sad."

Marese Conaty argues that those seeking IT jobs in new media accepted and thrived on the risk offered by the potential of share options.

"The industry is just so different to anything that has happened before to people. The whole industry is more flexible and people who want to work within it are by their nature passionate and entrepreneurial, and, at the end of the day, money does not drive them."

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