Human Capital & Careers

Cisco Mulls Changes to its Option Strategy

Why the technology bellwether may alter grant timing.
Craig SchneiderJanuary 2, 2001

It’s a dilemma shared by many companies these days, especially victims of the tech meltdown.

How do you motivate employees who have seen their companies’ stock price fall well below the strike price on their options?

Many companies disdain re-pricing the options, both from a public relations as well as a tax standpoint, nor are they keen on issuing options with below-market strike prices.

A prime example: Cisco Systems, whose shares recently hit a 52-week low of $35.16 during the Nasdaq nosedive.

However, the networking giant, which has been largely holding fast to its heavy equity-based compensation plan, is starting to tinker with its option program.

For example, it recently moved up the company- wide grant distribution by two months to last November.

“We factored the market volatility into the timing of the grant,” says Kate DCamp, Cisco’s global compensation leader. “Because the market had been flat to down, we went ahead and did it when we otherwise would have waited for it.”

The timing shift also was acknowledgement that a large portion of Cisco’s 20,000 new hires in 2000 had stock options that were subsequently way underwater, she says. “That’s a new thing for us,” DCamp adds.

However, the unexpected slide in its stock price has also put the newly issued options— which had a strike price of $50.38—underwater. As a result, Cisco is now mulling a more drastic change to its option strategy, accelerating the frequency of its stock option grants to employees, according to DCamp.

Until recently, Cisco typically gave all employees grants at the same time: First, when they are hired and again on one company-wide designated day within a 12-month period. The options then vested over a five-year period compared to three years for many tech companies.

Cisco is now studying whether to institute a more comprehensive form of dollar-cost- averaging for its option grants. In other words, it would take a set amount of options earmarked for an employee over, say, a 9- to 10-month period and grant them in smaller amounts, either biannually or quarterly. The goal, of course, is to reduce the effects of the market’s overall volatility.

“We’re looking into whether or not we can do it; whether or not it’s a good idea,” says DCamp. “So, it’s pretty early stage.”

DCamp, though, recognizes the potential downside: “You don’t want to have employees having vesting dates every 10 seconds and living off the options as income.”

Other Employee Incentives

Meanwhile, Cisco is using its stock to motivate its employees in other ways.

For example, it is currently experimenting with a program that offers a limited project- based group incentive to help motivate and retain employees.

Last March, Cisco’s board provided a pool of discretionary stock for each senior leader to use. And so far, three have incorporated it by setting milestones for certain projects. The groups mostly contain 20-30 employees in engineering teams that develop and design software and hardware.

One program — for a new software release — just triggered the first milestone, DCamp says. Cisco’s strategy is to accelerate some portion of the special grant, say 20% or 50%, to vest immediately when the first milestone is reached.

The rest vests more evenly over a set period of time. Goals are focused on time saving, cost reductions, increased productivity or some other milestone.

So if a product normally takes 18-24 months to get to market, Cisco can entice a group of employees to reach a testing milestone in six months and get it to market within 12 months.

But DCamp says the project-based incentive is only reserved for “mission critical” projects, where a group may need “additional focus” to go “beyond the ordinary performance of what you would get.”

While DCamp does not foresee any other incentive additions, she concludes, “we have to watch and see what happens over the next year or two.”