Smasharoo wrote:
Explain to me how the idea is even fucking SUPPOSED to work, just mathematically. "Instead of compensating them with stock options, we now compensate them with stock.
Um... You don't know the difference between stock options and RSUs? I'm not going to explain the whole thing, cause that would be ridiculous even for me.
It depends on the specifics of the option contract, but in general options allow the holder to wait until the ideal time/value to exercise them based on whatever earnings and tax interests the holder is pursuing. They provide greater flexibility for the holder to maximize their advantage from them, and because of the typically long terms involved, can absolutely result in compensation that is less tied to performance. RSUs are direct grants of X number of shares of stock at the time they vest. So compensation is immediate and based on the current stock value.
Typically far more options are granted than direct stock (like an order of magnitude or more difference). This is to offset the innate risk of stock options and the innately known value of an RSU. Ultimately (and I'm really trying to dumb this down for the audience here), it's about relative gains in the compensation compared to relative gains in the stock of the company. So let's say that you're granted 500 RSU that'll vest over the next 5 years (100 per year). Let's say the current value of the stock is $50/share. Looking purely at the first 100 shares, if the stock doesn't improve in value, you'll still get $5000 in stock (100 shares at $50/share). At that point, you can do anything you want with them. They're yours. If the share value improves to $60/share, you'll get $6000 in compensation. It's a direct relationship.
The equivalent offer in options might involve 5000 shares (10 times as many), also vesting 1000/year, with a 10 year exercise window. Here's where things get interesting though. The value of the option is *zero* unless the stock improves in value. You might say that this provides an incentive to increase the value, but that valuation is why you get more options than RSUs, thus really providing an larger reward for a smaller increase in relative stock value. So mediocre improvements result in artificially large rewards. Looking again just at the first year of vested options, you get 1000 options after one year. If the stock value stays the same, you have no value at all. But if, as in our example, it increased from $50 to $60, you "earn" the difference by exercising the share. That's $10 x 1000 = $10,000. That's a greater gain than the $6000 you gained with the RSUs.
When you add in the fact that the options can be exercised at any point in time, what it does is create a potential for large monetary gains based on what are really just normal market fluctuations. The CEO need do nothing special to improve the company and can count on at least some days in the future when the stock value will be higher than his purchase price, and gain a large reward. Obviously, if he does a great job and the company stock soars, he'll also make more under the options system. But the point is which system rewards mediocrity, and options have more potential for that.
Put another way, options artificially inflate the relative profit (to the recipient) gained from relatively small increases in stock value, while RSUs start at a given dollar value of compensation and adjust in direct proportion to the increase in stock value. RSUs allow the company to more accurately predict the relative value of the compensation itself, and avoid wild swings of massive profits or nothing at all. This again encourages steady growth for the company rather than "playing the market". Which, I'm hoping we all agree, is a good thing.
That was still probably a longer explanation than most people are going to read. There are reasons most companies are shifting from options to RSUs, and the potential for excessive profit taking out of proportion to actual long term company growth is one of the main ones.