I like many other employees I am partially paid in the form company stock. Companies rightly choose to pay their employers by stock options or outright stock grants as means to better align company and employee interests. Enormous stock option packages get a lot of press as they often pad CEO pay excessively, but stock options and outright grants are an important part of the pay package for many individuals. Stock options have made millionaires out of many Microsoft employees in the 80s and 90s. Today we have Google millionaires.

The real question of stock denominated benefits is are we to treat them like cash or are we to treat them as something more? I think most people treat them as something more. Some of this makes sense given that stock compensation typically have to become vested. Usually it takes at least a year before options or stock grants are vested. If an employee is terminated or leaves before the vesting period is over that employee forfeits his or her claim. That’s one issue - stock options and grants that have a lengthy vesting periods are only claims on compensation rather than outright compensation. For that reason, an employee might not want to count (reinvest) too early the chickens before they’ve hatched.

However, aside from the vesting issue which most employees have a pretty good sense if they will fulfill or not, there aren’t really all that many good reasons to hold onto stock grants or options unless required to by rules even when those grants haven’t vested. An employee can easily sell short company shares, or options without actually owning the shares or options. This might be seen as a vote of no-confidence, but it’s really an act of diversification. Most employees don’t have that much influence on the stock a price. If an employee were promised a cash payment, it would be generally be ridiculous for that employee to go and buy options or shares of the company. Effectively that’s what we do when we do nothing and hold onto shares or the options.

The risk because of the vesting period is that we never receive those grants or options. However, the only situation in which the hedges (i.e. selling short shares or options, or buying put options) would be out of the money is when the company is chugging along nicely, i.e. the stock price has risen. Under these circumstances, the most likely reasons for a employee not to meet shorter term vesting requirements are under the employee’s control. Either the employee chooses to leave or is terminated because of performance issues. The sensible thing for an employee with short term vesting options or shares is to hedge. This action would’ve certainly served the many employees at Bear Stearns well. Of course by hedging, it’s possible to miss out on millions like the ones reaped by employees of MSFT and/or GOOG. However for every Google there are dozens of pets.com. Keep the stock or options only if you think you would actually buy those same options in the open market.