Vesting encourages workers to stay

The Motley FoolMarch 24, 2013 

Can you explain “vested” and “unvested” options? – S.Y., Grand Rapids, Mich.

You become “vested” when you become eligible to take ownership of something or exercise an option. Imagine that you work at Typewriter Depot (ticker: QWERTY) and you’ve been awarded stock options on 100 shares of company stock. Let’s say that during the next four years, 25 percent of the options vest each April 1. On April 1, 2013, you’ll be able to exercise the option and buy 25 shares at the specified price. A year later, another 25 shares will “vest.” On April 1, 2016, you’ll be “fully vested” and can buy all 100 shares (or any shares you haven’t bought yet) – if you want to.

Companies structure rewards this way to motivate employees to stick around.

MY DUMBEST INVESTMENT

This isn’t necessarily my dumbest investment, but it’s one I have questioned. I have nine grandchildren. I bought a $50,000 variable-life insurance policy for each of them, paying an annual premium of several hundred dollars for each. My oldest grandchild suggested I should have invested the money in stocks instead. Quitting the insurance policies would mean paying heavy penalties and would leave the children unprotected. So I feel safe with the investment. – F.B., Endwell, N.Y.

The Fool responds: Even a mere $1,000 investment in stocks can grow to $45,000 during 40 years if it averages 10 percent annually. It’s best not to think of life insurance as an investment because there are more effective ways to invest.

FOOLISH TRIVIA

I was envisioned and coded in 1995 as a marketplace accessible to everyone on Earth. My first sale was a broken laser pointer, and now my sellers offer everything from Pez dispensers to minivans. Born as AuctionWeb, I have a more familiar name now. I boast more than 112 million active users around the globe, and more than $67 billion worth of goods were sold through me in 2012 (excluding vehicles). My PayPal division sports about 122 million active accounts and processed $145 billion of transactions in 2012. I also have bought Shopping.com, StubHub and Bill Me Later. Who am I?

Last Week’s Trivia Answer: Founded in 1949 by a New Jersey accountant, I now rake in more than $10 billion annually and employ about 57,000 people worldwide. Who am I? Answer: ADP

THE MOTLEY FOOL TAKE

Shares of Microsoft (Nasdaq: MSFT) grew by an annual average of 14.3 percent during the past 20 years, but only 4.5 percent during the past decade. Despite the reasons for the slowdown, the stock has some appeal at recent levels. It offers a 3.3 percent dividend yield as well.

Sales of its Windows 8 operating system have been disappointing. Bulls point to the company’s prodigious cash generation, but much of its income is tied to Windows and Office, which may suffer as PC sales have been shrinking. Even the Internet Explorer browser has been losing market share.

The company needs to develop big new profitable business lines, and it has several irons in the fire, such as a partnership with Nokia to develop inexpensive smartphones. It’s developing original entertainment to stream on its home consoles, opening retail stores, and addressing the business realm with servers and other tools. With a forward price-to-earnings (P/E) ratio of about 9 and tens of billions in cash in its coffers, the stock seems undervalued – as long as you have confidence in Microsoft’s future. (The Motley Fool owns shares of Microsoft.)

REACH THE GARDNERS AT FOOL@FOOL.COM OR MOTLEY FOOL, 1130 WALNUT, KANSAS CITY, MO 64106.

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