“Stock options were the near-magical currency of Silicon Valley, financing much of the huge success of companies such as Cisco Systems Inc. and Sun Microsystems Inc. For years, tech companies didn’t have to give employees much in the way of real money, because options, tied to the value of the companies’ stocks, were so valuable,” writes Rebecca Buckman in today’s Wall Street Journal.

“To employees, options were better than cash, offering the chance for riches far beyond any salary. Options inspired creativity, fiercely hard work and enough loyalty to stick around for the payoff.”

“But that formula depended on a surging stock. Now, U.S. stocks are in a dismal retreat, with tech stocks among the biggest losers. Employees of tech companies hold millions of options that have lost all of their value and may never regain any, because their exercise price is far above the price of the stock itself.”

“With little prospect of a tech rebound soon, the rip-roaring stock-option culture of Silicon Valley is another casualty of the worst stock slump in three decades. Says George Paolini, a former Sun vice president: ‘The options culture of the 1990s is dead.’ “

“The implications are far-reaching, for employer and employee alike. Technology companies such as Cisco, Sun and Microsoft Corp. relied heavily on stock options for compensation, a nearly cost-free way to both attract and retain top talent. Employees were reluctant to leave, because they often held newer options that were in the money but couldn’t yet be exercised. Quitting would mean forfeiting the gains. But for tech employees today, the prospect of riches through corporate loyalty is greatly diminished.”

“It’s an unfamiliar and potentially worrisome situation for the tech companies. Boosted by outsize grants in the top ranks, Microsoft employees averaged a whopping $416,353 in stock-based compensation in 2000, according to a study by Banc of America Securities analyst Bob Austrian. That plummeted to $131,525 last year and is expected to fall further this year. ‘If Microsoft continues to linger in this [stock] trading zone, I think there is a substantial risk for employee flight’ when the economy picks up and creates more jobs, says Samir Bodas, a seven-year Microsoft veteran who quit three years ago. ‘Their loyalty isn’t there.’ “

“The unsettling question this change in incentives raises is what effect it could have on America’s technological miracle. Tech companies increasingly have to compensate workers the same way other employers do — with paychecks. Salaries are an expense that, unlike stock options, companies can’t avoid deducting from their earnings. It’s also a stepped-up burden they certainly don’t need at a time when their businesses are substantially weaker than two years ago.”

http://online.wsj.com/article/0,,SB1026939419642538320,00.html