I’m posting this in IMHO, because I suspect opinions are all that will be available. But I suppose it’s possible an HR sort might appear with some definitive doctrine known in that field.
So what is a company thinking, communicating, etc. when it gives one person a bigger bonus and fewer shares of stock options while giving another person in a similar position a smaller bonus, but more option shares? With the immediate cash value of both packages being approximately equal, why not give them both the same thing? What does it mean?
Compensation strategy done well is supposed to be a motivational tool. It is very probable that the different bonuses are a product of the decision makers views on what motivates the two individuals involved.
Of course, they might just be using a random number generator for bonuses, just for sport.
I think stock is supposed to make the recipient want to increase the stock value, and cash is supposed to reward the recipient. Of course, these two motives aren’t mutually exclusive, but that’s how I’d contrast the two messages being sent.
Holy Crap! A question that I can actually answer (sort of)…
Without more information, it’s hard to assess exactly what is going on. I can think of three possibilities:
Grant Equalization - perhaps the person receiving the larger stock option grant needs to “catch up” with his or her peers, in term of equity compensation awarded.
Retention Consideration - depending upon the length of the option period, the company may be doing this to “handcuff” the employee that received the larger grant.
Variance in Cash Bonus Plans - assuming that the annual cash bonus plan is actually tied to company and individual performance metrics, the person receiving the larger cash bonus might have nailed some annual performance goals, thereby earning the larger bonus. (The company may have correspondingly reduced the size of the option grant for the person.)
There are also a myriad of other considerations, tax strategies, granting strategies, plus the fact that the company may just be shooting from the hip.
Maybe they have one formula that determines the amount of cash bonus, and one that determines the amount of options, and it just turned out that the combined value for these 2 people is approximately equal.
Options are a form of “compensation at risk.” So they are most geared toward motivating someone to have a direct impact on the profitability of the business. As a possible example, options may be used to motivate someone in sales or working on a long-term research breakthrough, and cash might be more appropriate for someone with responsibility for facilities, where steady performance is the goal.
Politics may enter into it, too. Perhaps the individuals in question have expressed a preference and succeeded in lobbying for what they want.
It’s generally a fair question to ask how your own compensation was calculated. Indicating that you’ve discussed and compared it with others will be frowned upon.