Study finds stock options popular but little understood
Commissioned by mutual fund company OppenheimerFunds, Inc., the survey was designed to determine the incidence of employee stock option ownership in the United States and to probe knowledge and interest levels among corporate employees.
While revealing a higher incidence of stock option ownership than many earlier surveys, the survey found that option holders are not well informed about basic financial and tax planning issues related to option ownership.
"The good news is that companies are doing a better job of sharing the wealth with their employees," said Marci Rossell, OppenheimerFunds' chief economist. "The bad news is that employees are frequently poorly prepared to tap and manage that wealth."
Research firm Validata Research, LLC conducted a nationwide random telephone survey between April 18 and May 10, 2000 of 1003 people over the age of 18 who are currently employed with a private sector company. Of the 1003 respondents, 107 currently owned employee stock options and 896 did not. The sample of 107 who owned options was then supplemented by interviews with another 200 option holders.
Options rise in importance
Sixty-three percent of those surveyed who currently don't own options said it would be at least a somewhat important consideration if they were to look for a new job and 28% said they would consider taking a lower base salary in exchange for stock options.
And, increasingly, employees are looking at stock options as a way to secure their financial future. Sixty-three percent of stock option holders said their options would play an important role in planning for future financial security.
"Once reserved strictly for senior management, employee stock options have become an important thread in the fabric of the American workplace," said Rossell. "Stock options are very much the subject of water cooler conversations and, increasingly, fair game in job interviews."
Despite the proliferation of stock options, general knowledge about them, even among option holders, is low, the study found. For example:
- 39% of option holders said they knew "little" or "nothing" about their options and another 35% said they know only "something";
- 52% said they knew "little" or "nothing" about the tax implications of exercising options;
- 75% said they knew "little" or "nothing" about the Alternative Minimum Tax, which can be an important tax planning consideration;
- 11% have allowed "in the money" options to expire worthless;
- 37% said they know more about Einstein's Theory of Relativity than they did about the tax implications of exercising stock options.
Individuals' lack of knowledge also extends to their own portfolios. Even when prompted, 34% did not know whether they had Non-Qualified Stock Options (NSOs) or tax-advantaged Incentive Stock Options (ISOs). Twenty-nine per cent of option owners did not know what percentage of their options was vested.
"Employee stock options have become a significant part of many people's net worth and yet it is clear that many option holders are not as well-informed as they should be," Rossell said.
Too much of a good thing
If employees aren't careful, stock options, particularly when combined with company stock, can result in a skewed and risky portfolio.
Thirty-two percent of option holders had 20% or more of their financial assets in stock options and outright shares of company stock, while just under one in five (19%) option holders had 30% or more of their net worth tied up in company stock and options. In fact twelve percent had 40% or more of their financial net worth in stock options/company stock.
When asked about the percentage of their net worth tied up in stock options/company stock, only 13% of respondents thought they had "too much" tied up in company stock and options.
Company loyalty may be skewing employee judgment. Among workers who had never exercised options, 37% said they did not want to sell because the stock has been a great investment. Another, 17% said they felt loyal to the company and didn't want to exercise, and 49% of people thought that their company stock would outperform major competitors over the next five years.
"If you were an employee at Microsoft or Dell for the past ten years, the company probably made you a lot of money through options. So, why would you want to sell?" Rossell said. "But that's not a typical option holder's experience. Having more than 20% of your financial net worth tied up in the equity of one company is an exceedingly risky idea."
A need for advice
Despite their low level of knowledge on option exercise and tax strategies, people have been slow to seek out professional financial help, the study found. Only 36% of all option owners have actually sought the advice of a financial professional about issues related to stock options. Nineteen percent went to co-workers, friends or family members.
A similar pattern exists with those options owners who have exercised options. More than half (52%) did not get any advice at all when exercising, while only 34% spoke with a financial professional. Twenty percent consulted a co-worker, friend, or family member.
In terms of employer education efforts, 74% of option owners felt that their company did a good or excellent job educating them on options. But only 18% of people said that the information was part of a group meeting and only 9% met with a HR representative. In 70% of the cases, the employee was simply given a packet of material.
"This is clearly a case of people not knowing what they don't know," said Jim Ruff, president of OppenheimerFunds Distributor, Inc. "People think they are getting good information and the companies believe the education they provide is sound. The overwhelming evidence shows most employees just don't know enough to exercise informed judgments."