Market Motivation : Top Companies Are Bullish on Plans to Help Employees Think Like Owners With Bonuses Straight Out of Wall Street

“Congratulations!” the letter reads. “In recognition of your value to the company, each eligible employee has received an option to purchase 100 shares of XYZ Corp.”

Sounds great, but what does it mean?

For a growing number of rank-and-file workers in corporate America, sorting through the elements of a benefits package entails puzzling out how to play the stock options game. Primarily reserved in previous years for top executives and workers at cash-poor technology start-ups, stock options are filtering down to the cubicles, factory floors and fast-food outlets of America.

About 10% of Fortune 500 corporations grant so-called broad-based options to all or most of their workers, according to Hewitt Associates, a benefits consulting firm based in Lincolnshire, Ill. Among the proponents are AirTouch Communications, Apple Computer, General Mills, McDonald’s, Rubbermaid, Wal-Mart Stores, pharmaceutical giant Pfizer, Pepsico and Times Mirror Co., publisher of the Los Angeles Times.

Company boards of directors “are trying to drive the idea of having employees think like owners,” said Donald L. Fisher, a vice president at Compensation Resource Group, a Pasadena firm that advises companies on pay packages. “There’s a general move away from using base salary as a motivating device.”

Employee stock option programs can take a variety of forms. The simplest plan grants workers a given number of shares if they remain at the company for a specified period. The option price is usually set at the time of the grant. Employees get to pocket whatever gain stacks up in the meantime.

Here’s an example: A 10-year, 25-share option granted in 1995, when the share price was $10, would enable an employee to buy 25 shares for $10 each if he or she is still with the company in 2005. If, by then, the price is $30, the employee’s gain is $20 a share, or $500.

About half the existing broad-based options programs have been instituted since 1994. Their implementation follows a tumultuous period of corporate consolidation and layoffs that left many employees feeling they were working harder for less reward.

Indeed, although chief executives’ pay has soared--fueled largely by their own lucrative option grants and a bullish mood on Wall Street--workers for years have experienced skimpy annual pay gains. Shareholders, meanwhile, have reaped historic gains--an astonishing 17% a year since the early 1980s--as the stock market has lofted into record territory.

Companies have come in for harsh criticism in recent years for their focus on maximizing shareholder return at the expense of other corporate constituents such as employees and communities.

Granting stock options to a large number of employees has been viewed as one way companies can allow workers to share the gain as well as the pain. Some companies grant options on a one-time basis, with no guarantee that such a gesture will be repeated. Others offer them fairly regularly--perhaps every three or four years.

Pepsico, which owns the Taco Bell, Pizza Hut and KFC restaurant chains, annually gives all full-time workers options worth 10% of their previous year’s salaries. At companies such as these, which depend heavily on cheerful interactions with customers, options can help workers understand the connection between their performance and the company’s performance. The program has helped reduce employee turnover, a serious problem in the restaurant industry.

There are plenty of caveats, however.

Poor stock performance can render the options effectively worthless, making workers feel sold out. Also, if a company grows too large, employees can lose sight of the connection between what they do and how well the stock performs.

When it comes to making options plans understandable for the average worker, communication from above is vital. “It takes a lot of work,” said Robin Ferracone, senior vice president of SCA Consulting (formerly Strategic Compensation Associates), a Los Angeles firm. “You have to really educate people.”

At the moment, she noted, “there’s a huge bandwagon effect” as companies flock to these plans.

But some pioneers are taking another tack. Houston-based Compaq Computer Corp., which used broad-based options through 1991, found that employees tended to treat them as additional cash compensation rather than hold on to the options or use the proceeds to buy shares. That, in turn, tended to depress the value of company shares, as employees cashed in their options, putting more shares on the market. The all-employee option plan was scrapped in favor of a profit-sharing program.

“We decided it would be easier to communicate a profit-sharing plan,” said Ron Eller, Compaq’s vice president of corporate compensation and benefits. Twice per year, employees receive a percentage of net operating income, so they can grasp more easily the correlation between performance and reward. Stock options are still granted to 10% of the work force, including senior executives and others with excellent performance, Eller said.

Some compensation experts see a different potential downside for employees.

“Maybe [companies] give options, then quietly ease the foot off the accelerator” when it comes to basic pay raises, said Graef Crystal, a San Diego consultant. Stock options might give employees “a warm feeling” about the company, Crystal noted, but “the notion that somebody’s truly going to be motivated by this is hard to push.”

The fact that many companies are climbing aboard the options bandwagon after a sustained upward run in the market is troubling to Richard Kantor, a Hewitt Associates principal in Newport Beach who focuses on compensation issues.

“You could argue that’s the worst time,” he said, because stocks might be peaking before a long slide.