"We can really use your financial expertise, Brad, but we can't afford to pay you right now. What if we give you stock options instead?"

There were times during the '80s and especially in late '90s when we heard that offer more than half the time with prospective clients. Of course, we were working frequently with start-ups in those years, and options were the coin of the entrepreneurial realm.

I have to admit that we were tempted on a lot of occasions, especially in situations where Smart Money had already made a significant investment. How could we doubt the opportunity?

Well, having five kids and a mortgage on a house big enough for all of us put a significant premium on cash. And having one Big Formative Experience early on when my investment in a client company went belly up — despite many signs that we had the winning combination — taught me you can't control all of the circumstances that lead to small business success. Sometimes luck really does play a role. We subsequently decided to take luck out of the equation by getting paid up front by all clients and not hesitating to suspend our services when "overdue" crept beyond 30 days.

So we have missed some client winners and we've avoided some few client losers, but almost always we've left on good terms, paid in full and having helped our clients to identify and transition to our full-time successor. There's no tail on the relationship, no minority stock interest that survives our involvement or requires us to be bought out. As a result, when an iBasis goes public or a Sensitech gets acquired (by Carrier Corporation), there's no "liquidation event" to contribute to our comfortable retirement. At the same time, when a KaBloom or a Zoots never really achieves lift-off in the years after my departure, I'm glad that we left nothing on the table as we said our goodbyes. For all four of those companies, we were the "founding" CFO.

Thus it is that I have a particular bias when my newest client says to me last week, "We can't afford a bonus for the staff right now; maybe we should consider a stock option plan. What do you think?"

This is a consumer product company that grew from $2MM to $10MM over a five-year period with almost total emphasis on the top line. When they stopped to catch their collective breath at the end of 2007, they realized that the bottom line had gone in the other direction. They then cut staff by 60%, outsourced some work, and asked everyone to work harder in order to keep the company afloat. Well, naturally, resumes immediately hit the street, and Monster and Craigslist became popular lunchtime (at least!) website diversions. Good people started leaving, despite the owner's promises to guarantee four weeks of severance pay in the event of further lay-offs.

Here's what I thought:

• The majority of these employees are relatively unsophisticated, $15-20/hour workers, most of them probably living paycheck to paycheck. Their critical compensation issue is keeping ahead of inflation, especially at the gas pump, since most of them drive some distance to the plant.
• Reassurance about their job security, when it comes, will be via the accounts payable clerk, who will no longer be getting daily dunning phone calls from all of the vendors. It will also be via the purchasing manager, who will be able to order enough incoming product to avoid expensive "short-ship" deliveries to customers.
• They don't want promises — they want to know that management has an economic model that's going to work for the company. It doesn't take a lot of sophistication for them to understand that with 50% margins on shipments combined with less than 8% returns and allowances, the company can make money. They know that when ship dates are missed, competitors' products fill the retail shelves, and there's a significant opportunity cost.
• What are these folks going to do with a stock option? It can't buy gas. It doesn't pay the mortgage. You can't offer it to the bank as security for a loan.
• They need reasons to believe in the company. They need to see the number $800,000 at the top of the employee bulletin board each morning when they punch in, so that they know the sales target for the month. At the end of every day they need to see a record of their progress toward that goal.
• Beyond that, they need some education. Management has to share the other components of a positive bottom line: here's the average margin on today's shipments vs. our target. Here's the month-to-date return/rework percentage compared to our goal. Here's evidence that overhead expenses are under control. Most importantly, here's how each of you employees can contribute to achieving our goals.
• It takes a couple of months. That's all. When employees achieve their production goals and expenses stay in line with the plan, the bottom line turns black. People start getting reassured: everyone understands a positive bottom line. It means that the vendors get paid, the bank gets paid, and my job still exists.
• It also takes timely and accurate financial statements. Because then you can establish incentives: a 10% bottom line this quarter means an extra week's pay for everyone (effectively a 7.7% bonus). That's what puts gas in the tank and food on the table for the vast majority of employees in this country.

Don't get me wrong. Stock options can work out well, though a lot of dot-commers (dot commas?) were disappointed a few years ago. For senior managers and others with a strategic perspective for whom such awards constitute discretionary income, aligning rewards around an exit strategy can produce a powerful set of incentives. For the rest of the team, however, the absence of an immediate pay-off may mean "here today, gone tomorrow" as they consider their options.