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Netflix Reverses Stock Option Policy in Hunt for Talent

Question: Who in Silicon Valley would choose to work for a company that didn’t pay bonuses and only gave employees stock options if they were willing to forgo part of their salary in exchange?

Apparently, not too many, if Netflix’s experience is anything to go by. That unusual stock-for-salary allocation approach has been a central element of the streaming video outlet’s compensation policy for years, part of what it likes to call its “high-performance culture.”

But in response to the intense competition for talent from other Silicon Valley companies, Netflix has told its employees it is changing its policy, bringing it more in line with the rest of the tech industry. While employees will still be able to elect to receive part of their salary in the form of options, starting next year they’ll get an automatic grant of options on top of their salary.

The change is a rare retreat by Netflix, whose policy was described by compensation experts as highly unusual and often hard for employees and prospective hires to understand.

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While the tax benefit is widespread, it’s somewhat less common for companies to generate cash from employees. Some companies follow a practice calling “net settling,” where they don’t take cash from employees but take payment in the form of some of the shares received in the option exercise. Otherwise, as Netflix is doing, a company is using employee option exercises simply as a way to raise cash through equity sales.

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But the stock drop had a golden lining. Because the monthly grants are set at a dollar value nominated by the employee, the lower the stock price prevailing, the more options are granted.