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Stock Options: Who Gets What?

By Corey Rosen, NCEO Executive Director

July 2002

There seems to be a lot of confusion right now about just how many people are getting stock options and how much they are getting. The truth is, no one can be exactly sure. There is no reporting system for these grants that could provide a reliable data source. So the NCEO has constructed estimates based on a study by the Bureau of Labor Statistics and surveys by a number of large consulting firms, including Mercer Consulting; Hewitt Associates; academics Edward Lawler, Susan Mohrman, and Gerald Ledford; and Segal Sibson, all of which came to compatible conclusions.

How Many People Are Getting Options?

From these surveys, we estimated in 2000 that approximately 7 to 10 million employees now hold stock options. But because options are often not granted annually, especially in some very large companies with broad-based grants, that does not mean that 7 to 10 million people get options granted to them every year. That number is probably in the range of three million per year. (For a longer discussion of how we arrived at these numbers, see pp. 467-69 of Current Practices in Stock Option Plan Design, the study mentioned below.)

Has the Number of People Getting Options Grown?

We estimate that the number of people getting options grew dramatically in the 1990s; growth since 1999 probably has leveled off as the tech sector's growth has slowed. In 1992, only about one million people had options. The table below shows estimated growth over time (remember, these numbers represent the number of employees holding options, not the number of employees receiving options in a particular year):

Estimated Growth of Optionees Over Time
Year	Number of Employees Holding Stock Options
1992	1,000,000
1993	1,750,000
1994	2,350,000
1995	3,400,000
1996	4,000,000
1997	4,000,000 - 5,300,000
1998	5,700,000 - 8,400,000
1999-present	7,000,000 - 10,000,000

Who Gets How Much?


	Current Practices in Stock Option Plan Design is the book on our 2000 study.

In terms of the distribution of options, that can best be measured by first looking at the number of options granted. Looking only at companies with broad-based plans (which we define as plans in which over 50% of employees receive option grants), our study Current Practices in Stock Option Plan Design found that 34.1% go to senior executives (defined in the study as senior vice presidents and above). This includes grants under all plans; for example a company might have a broad-based plan covering most of the employees plus a plan just for senior executives. About 30% goes to nonmanagement employees, and the rest goes to management other than senior executives. Senior executive grants are a lot larger, of course. Looking at the most recent grants from the survey, the average grant value (calculated as the number of shares times price of the stock at grant) was $511,000, compared to $7,982 for hourly employees and $35,481 for technical employees.

Please note that the above numbers are for companies that grant options broadly. Most companies do not do this. If you examined all U.S. companies that grant options, you might find that most options went to senior executives, because the companies that didn't grant options broadly would skew the average produced by combining these companies with other companies.

What Companies Provide Broad Options?

It is important to look at who provides broad options. Most technology companies do; according to a Segal Sibson study in 2000, about 30% of companies in the finance and general manufacturing sectors make most employees eligible for options (although only about half of these companies will actually grant options broadly). The numbers drop off sharply from there. Based on the several studies mentioned above, it seems clear that about 20% to 25% of public companies provide options to most or all full-time (and sometimes part-time) employees.

Performance Impact

Finally, there is the issue of performance. A study by Douglas Kruse, Joseph Blasi, Jim Sesil, and Maya Krumova found that productivity rates did improve with the institution of a broad-based plan. The difference between productivity scores for the sample of broad-based options plan companies from their pre-plan period to a three-year post-plan period was 16% when the comparison group was all non-option companies and 19.4% when looking just at comparisons in their industry. Neither result is likely to have occurred at random. Return on assets (ROA) showed a similar pattern. Here the stock option companies showed an improvement of 2.5% per year on ROA relative to the full sample in the post-plan period compared to the pre-plan period. When just paired comparisons are used, the improvement was 2.05%. Again, these results were very unlikely to have occurred randomly. Total shareholder return, however, showed no statistically significant difference, up or down, in the relative performance during the two periods (meaning the researchers cannot be sure that the results they found were not just random). But looking at the shareholder results in a different way--just looking at how options companies did relative to non-options companies without holding their pre-plan performance constant--options companies did much better. Details on the study are at http://www.nceo.org/library/option_corpperf.html.

What Happens If Expensing Is Required?

What would happen if options expensing were required? It really is impossible to say. Outside of the group of companies that grant options broadly, most option value goes to top executives. So if companies want to reduce the apparent costs of options, they need to reduce top executive grants, not broad-based grants. Moreover, if they want options to improve performance, they need to focus on making and keeping broad-based grants an important part of their culture.

Corey Rosen is the NCEO's executive director. He can be reached at CRosen@nceo.org.

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