Stock Options at eBay Case Study Example | Topics and Well Written Essays - 2250 words

Stock Options at eBay - Case Study Example With a diverse and passionate community of individuals and small businesses, eBay offers an online platform where millions of items are traded each day. It was started in 1995 with one employee and it has grown to employ thousands of employees today. Any company's future success and profits depend on their employees and the senior management. Even eBay feels that their success was dependant on their key management and their technical staff. As such eBay tries to retain their key personnel officers for the long-term to gain more profits, but they don't have any long term agreements with employees and they don't even maintain life insurance policies on their key employees. eBay attains more profits in land based auction businesses and those are dependent on specialists and senior management as these individuals have established good relations with sellers who transfer property for sale at auction. As the company is growing and the number of employees is also. The company has to attract more people and has to train them and retain them in the company for the long term, particularly the employees who are highly skilled, technical, and m anagerial. Stock options issued by a company allow the employee to buy specific amount of the company's stock at a certain price after a set period of time (the vesting period). Stock options are useful to align the interests of the employee with those of the company. Since the stock options will be profitable only if the company's stock goes up, the employee has incentive to work hard and ensure the success of the company. Also, since the options can only exercised after a certain period of time, the employee has to stay with the company. This promotes employee retention. Furthermore, by giving out stock options, the company can reduce other forms of compensation and reduce its immediate cash expenses. In this way, stock options are a better method of compensation compared to cash or stock. Let's take an example: Let's say you are hired by eBay and they offer you options to buy 10,000 shares of eBay stock at $10 within the next three years. This stock option gives you the right to buy 10,000 shares of eBay stock at exactly $10 after three years. Let's say after three years eBay stock is at $15, you can exercise your stock options, buy 10,000 shares for $100,000 and sell them on them for $150,000 making a $50,000 profit. Now, let's say eBay's price after three years is $5, your options would be worthless. Thus the options incentivize you to work hard to ensure eBay is successful as measure by a stock price greater than $10. Also, you are required to stay for at least three years to profit from your options. From this example, it is clear how stock options align the interests of employees with those of the company and promote retention. The options did not also cost the company upfront. Neither cash nor stock has all these advantages, and hence eBay compensates employees with stock options. Question 2: What are at least four benefits of choosing stock options over other compensation methods Compensation packages are a means by which companies can achieve several different goals related to recruitment,