Pocket Pickers

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The battle raging over stock-option accounting is enough to put most folks to sleep. Yet 14 million workers in broad-based stock-option plans have a direct financial stake in this skirmish — as do, it turns out, many folks who invest in common stocks. Recent studies have concluded that companies with widely dispersed options outperform companies that grant options only at the executive level. This adds a layer of drama to the latest efforts to require that options grants be treated as an expense that reduces reported profits. No one expects fat-cat execs to take a big hit on their own overall pay. To offset the costs, they would cut rank-and-file options plans — and in the process squash a valuable investor ally.

The airline industry shows how broad-based options plans relate to performance. Shares of Southwest Airlines, which has long included many employees in its plan, have risen threefold in the past 10 years. Delta, which shelved its broad plan in 1998 and grants options only to executives, has fallen 80%. JetBlue, which has a broad-based plan, has been a winning investment since its debut two years ago. American Airlines had been dead money for 10 years; then it started to distribute options broadly, and in the past 14 months the stock has tripled.

The airlines are going through wrenching change, and many forces are moving these stocks. But it's no coincidence that the companies spreading options around to most employees are rising to the top. It's much the same across industries. Companies like Starbucks, Pfizer, Whole Foods and Washington Mutual have broad plans. Each is a leader in its field and boasts an outperforming stock. "Do companies with broad-based options plans get more out of their employees? Or is it simply that companies that are good in the first place grant most employees options?" asks Corey Rosen, executive director of the National Center for Employee Ownership. "We don't know, but it doesn't matter." The result, he says, is that broad options plans correlate with high returns.

This isn't foolproof. In the tech industry, where the vast majority of companies grant options to the rank and file, not all can end up winners. Indeed, many have taken their lumps of late. Still, a study by Douglas Kruse, Joseph Blasi and Jim Sesil of Rutgers University and Maya Krumova of the New York Institute of Technology found that productivity rises almost 15% and return on assets rises 2.5% after a company adopts a broad-based options plan. Other studies have found that merely announcing a broad plan boosts a stock nearly 2% and that the benefits are consistent in large and small companies in both bull and bear markets.