People Crave Stock Options But Don't Understand Them
39% of workers who have sought-after options can't figure them out

Reprinted from our newsletter: by Sandra Block from USA Today.

An estimated 12 million U.S. workers own employee stock options, but many say they know more about Einstein's theory of relativity than the way their options are taxed.

A new survey commissioned for OppenheimerFunds found that workers use stock options as an important factor when deciding whether to accept a job. But 39% of workers who own options said that they know little or nothing about how they work.

The knowledge gap can be costly. According to the survey, 11% of workers have allowed profitable options to expire, rendering them worthless. "That's just the money left on the table," says Marci Rossell, Chief Economist for Oppenheimer.

Employee stock options give workers the right to buy a fixed number of shares of a company stock at a specified price, known as the exercise price, during a limited period of time. If the stock market's price exceeds the exercised price, the option holder can exercise the option and sell the stock at a profit. If the stock's price falls below the exercised price, the option becomes worthless.

The most common type of stock options are non-qualified stock options, which are frequently awarded to employees at all levels. The second type, incentive stock options, are more often given to senior managers. The two types of options are taxed differently and operate under different rules. Profits from non-qualified stock options are usually taxed at the workers' ordinary income tax rate, while profits from incentive stock options are taxed at the lower capital gains rate.

Yet according to the Oppenheimer survey, 34% of workers don't know what kind of options they own. And exercising incentive stock options can trigger the alternative minimum tax, a complicated I.R.S. rule 75% said they know little or nothing about.

Even veteran options holders find the rules confusing. "I'm a finance major and I do my own taxes, and it's still not easy to figure out," says Steven Griffitts, a sales manager in St. Louis.

Other findings:

While the stock market's sluggish behavior has made many stock options less attractive, employees still want them. More than half of workers surveyed said that options would play an important role in determining whether to take a new job, and 48% said the programs play an important role in their willingness to stay. "I think they're added gravy to entice quality people," says Dave Pressel, a sales representative in Tarrytown N.Y. who owns stock options.

Stock options can lead to a dangerously concentrated portfolio. About 19% of options holders surveyed have 30% or more of their net worth tied up in company stock. A company set-back could jeopardize those workers' salaries and savings, Rossell says.

"Having more than 20% of your financial net worth tied up in the equity of one company is an exceedingly risky idea," she says.

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