Open guide to equity compensation

The Netflix approach to this [1], where Netflix allows employees to choose how much of their compensation is cash vs options seems like the best approach - you can tune based on your risk tolerance.

> Each employee chooses each year how much of their compensation they want in salary versus stock options. You can choose all cash, all options, or whatever combination suits you. You choose how much risk and upside (down) you want. These 10-year stock options are fully-vested and you keep them even if you leave Netflix.

[1]: https://jobs.netflix.com/work-life-philosophy

Is there some bonus given if you choose stock options? Otherwise, what would be the incentive of taking options over cash in any amount?

If you think NFLX is going to increase x%, then your total comp goes up accordingly. If you took straight cash, you'd only recognize those same gains if you had purchased NFLX with it.

It's actually more than that, because the option costs less than the price of a full share. i.e. if your comp is $400k and you choose 100% stock options as your comp, that value allocation will almost certainly control more shares than if you took 400k in cash and used that to buy all NFLX shares.

If that wasn't the case then yes, there would be no reason to take options as comp because obviously (as you say) you can just buy NFLX on the stock market directly with some or all of your cash.

I realize this is still confusing, so here is a concrete example with made-up numbers.

---

Netflix offers you stock options that themselves are worth $100, based on various input factors like fair market value of NFLX, interest rates, volatility, dividend yield, etc). Now let's say the strike price of those options is $900. You decided you want all of your $300k/y comp in the form of these options (which are valued each at $100), so you end up with the option to buy 3000 NFLX shares at a later date.

Netflix has a great year (partially thanks to you!) and now NFLX is trading at $1200. You exercise all of your options, buying 3000 for $900 each and immediately selling them for $1200. Net profit: $900,000.

If you'd taken the cash you'd have $300,000.

If you'd taken the cash and immediately invested all of it in NFLX (and then sold them at the same time as the first example), you'd have $400,000.

At least when I was there the options cost 40% of the strike price (whatever the current market price was at time of issue). The other difference is that you shift the income tax to time of exercise.