38 years ago, my dad founded a media buying agency in Chicago.

I used to crash the place when I was a kid. On weekends in the early fall before school had started—provided there wasn’t a Northwestern University football game to catch—my brother and I used to go downtown with him for the day.

There was nothing better than running up and down their enormous empty floor, which towered over the stubby old Sun-Times building at the edge of the Chicago River. We’d bring our baseball gloves into the office and pretend we were Bill Madlock and Manny Trillo—the only Cubs players that could qualify as heroes at the time—diving around hallways and bouncing off the tall glass windows.

My father and his business partner, a charismatic sales executive who once starred in a St. Louis-based children’s program called “The Happy Herb Show,” sublet the floor from IBM, and—much to the chagrin of me and my brother—it wasn’t long before they filled the place and moved across the river into their own space.

Over the past 35 years, the company has seen its cycles, but it’s now a machine, consistently cranking out $100 million in billings every year, with over 100 employees that seem to have been there forever.

Which is strange.

In fact, until recently, I never knew why anyone stayed, as the company offers no stock options for employees.

Unconventional Wisdom

Over the past decade, most companies assumed that stock options were mandatory to recruit and retain employees, and to get them to focus on the long-term best interests of the company and its shareholders.

But that's not usually how it works.

Stock options get employees to focus on the value of, well, their stock options—often with blinders on. When the rank-and-file get stock options, they immediately begin to focus on vesting dates and vesting cliffs, cashing out and moving on. And when the stock moves southward, what usually sets in is frustration and apathy, not team-spirited “rah rah” motivation or increased productivity.

In fact, a 1995 study published in the Journal of Accounting & Economics found that, of 60,000 employees with stock options, most sold their stock immediately after they exercised the options. In addition, employees commonly sacrificed half the value of the options by exercising early. In other words, the options don’t function as a long-term employee retention—or shareholder creation—device, but as a timed ATM machine operated by anxious (and opportunistic) employees with itchy trigger fingers.

And that study was conducted before the Internet bubble.

In fact, options can get everyone focusing on the wrong things, even CEOs. In a study of over 2,000 CEO stock option awards, two Stanford business school professors discovered that corporate executives tend to “manage the timing of key company announcements, such as earnings projections, to increase the worth of their awards.” Related research from three business-school professors at Wake Forest, Univ. of Houston and Univ. of Texas at San Antonio noted that “managers intervene in the financial reporting process in order to lower the exercise price of their option grants prior to option award, thus increasing the value of their option compensation.”

Not exactly the way you want executives making decisions. But that's exactly the point: Even at the best of companies, stock options don't necessarily motivate executives to make long-term decisions that are in the best interests of shareholders.

Roger Martin, Dean of the University of Toronto's Rotman School of Management—which The Wall Street Journal ranked among the best business schools in the world—published an article last year outlining "why stock-based compensation doesn't work." Martin, formerly an advocate of stock-based pay, contends that stock-based compensation doesn’t provide an incentive for executives to increase earnings, but rather to increase expectations about earnings.

No surprise there. Most stock option plans emphasize personal equity value at the expense of shareholder value by inducing short-term exit at the expense of long-term commitment. That's one of the reasons former SEC Chairman Harvey Pitt recommends in his column this month that companies issue restricted stock and not options for senior executives.

Beyond Options

To expect long-term dedication and performance from employees, you need much more than options: A shared vision, a charismatic leader, competitive salaries, advancement opportunities, ongoing training, a commitment to employees, and myriad other factors including ethical leadership.

But we don't usually think of ethical leadership in those terms, and in fact it's underestimated as a shareholder value creation device.

My father would have done anything for his employees, and they knew it.

I remember him visiting their parents in the hospital. He made a commitment to their development and well-being. He knew details about their personal lives and professional aspirations. And the first year the company generated a profit, he paid almost every penny out to his employees, shocking some with their bonuses.

He was relentlessly committed to doing the "right thing," and over 38 years that passion has filtered throughout the company's culture.

My dad never went to business school, but he knew what HBS professor W. Earl Sasser has been championing for 30 years: That success is fundamentally and intrinsically linked to critical elements of the business; namely, customer and employee loyalty.

At one of his company’s annual holiday parties, a client of my father pulled me aside and said, “Your father is one of the most ethical business men I’ve ever dealt with.”

That stuck with me, and I’m sure it stuck with my father’s employees.

Ethics and ethical behavior have an intangible value for employees and customers that far exceeds what stock options could ever achieve. That's why Deloitte & Touche has committed $1 million to provide business ethics training for Junior Achievement, and why nearly 1,000 D&T employees are volunteering their time to do so. And it’s why Merck has opened ethics centers in the Middle East.

And it’s why my dad never needed to issue widespread stock options as a long-term incentive to employees.

Stock options are important, but we shouldn't pretend that they're mandatory, or that Silicon Valley will fall into the Pacific if they get expensed. According to a survey conducted by Business Week, options may be valuable retention tools, but when it comes to creating long-term value, bonuses, raises and “other rewards may work just as well or better.”

No kidding.

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