Question

Consider the scenario in which employees are granted stock options at a fixed price in exchange for not receiving pay raises. Now they are both stakeholders and stockholders with conflicting interests. This was not an entirely unusual occurrence in the airline industry, and others, in the 1980s and 1990s. Workers would agree to take stock options at the current market price upon ratification of a new contract instead of a pay raise or to use a portion of their pay to buy stock in the company. Under such a scenario the workers would need the stock price to increase above the initial option price in order to earn a return on the foregone pay increase and, thus, their interests were partially aligned with the stockholders and management. On the other hand, bills and daily living expenses cannot be paid with stock options before they have been sold, and thus, the workers often felt they should have taken a pay increase instead of the uncertain promise of greater gains from the stock options. What might you do under such a scenario?

Answer 1

If I was in such a situation where I had to choose between a pay raise and a stock option, then I would have chosen a pay raise. The main reason for this is the uncertainty related to the rise in the price of the stock option in future. As mentioned by the time value of money, the value of money received today is always more than the value of money that will be received in future. Moreover, the stock option was being given at fixed price. So, one would have to wait for the rise in the stock option in order to sell it and get the value equal to or greater than their raise in pay. Every time a pay raise should not be given in the form of a stock option. Instead, sometimes the workers can be given stock option and at other times the pay raise should be given in terms of money.