Tuesday, July 15, 2008

Share options

Up until 10 or so years ago, very few companies paid any bonuses. Financial engineering in the financial industry heralded the true arrival of huge bonuses, with ibank employees working as sales people. You'd hear of guys getting over a KSh2m after tax and doing all kinds of crazy stuff. Then came the dotcom era ushering in 100% share option-bonuses that were used to retain highly qualified staff who were in effect the only asset of the dotcom firms. It then dawned on sharp-witted accountants that share options were in effect being used to hide the true cost of human resources by most companies and the proportion of bonuses offered as share-options was reduced. Still, today almost all private sector companies do offer share-options either voluntarily or in the case of banking sector, upende usipende. In Kenya, more and more of listed companies are offering share-options.

It’s thus an opportune moment to review the full story of such compensation. Share-options are a very good idea during a bull market when employees know that the value of their shares will grow. It then works as a loyalty weapon.
Alas, during the bear market the opposite occurs. Imagine if you'll somebody working in the financial industry who earlier this year received say 500 shares priced at 15% discount to the price in early February. Today, shares of most financials are down by around 40%+ from that point and if he/she also got shares last year probably down almost 70%. So would there be a point in staying with a company in that situation?
Coming up next... the next stage in share options where companies will be offering shares based on what they hope are their trough prices...

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