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Home > Stock Options > Books >
January 2007. 44 pp. (8.5" x 11"), printout (not a bound book). $15 for NCEO members; $25 for nonmembers.
This research-based issue brief, first published in 2004 and completely revised and updated in January 2007, looks at how the markets will react to stock option expensing, how expensing and greater concern about dilution are affecting broad-based equity plans, and the impact of broad-based plans on corporate performance.
Executive Summary
Introduction
Will Expensing Really Affect Stock Prices?
2006 Credit Suisse Study
What Finance Professors Expect
2004 Elayana et al. study
2003 Ernst & Young Study
2003 Watson Wyatt Study
Towers Perrin 2002 Study
The 2002 Haidan Li Study
What Will Companies Do About Broad-Based Equity?
The 2005 Deloitte Stock Compensation Survey
2005 WorldatWork Salary Budget Survey
The Future of Equity: 2003 and 2005 Mercer Human Resource Update
The State of Stock Options 2003
2003 Technology Compensation Survey
SFAS 123: Responding to Mandatory Expensing
Post FAS 123(R) Results
2005 Bureau of Labor Statistics Survey
2006 Culpepper & Associates Study
2006 NASPP Study
2006 NCEO ESPP Study
2006/2007 Watson Wyatt Study
2006 PriceWaterhouseCoopers Study
Implications
Employee Ownership and Corporate Equity: Does It Matter Who Gets Equity?
Broad-Based Ownership and Corporate Performance
Broadly Granted Stock Options and Stock Prices
Broadly Granted Stock Options and Corporate Performance
Studies on Executive Equity Compensation and Corporate Performance
Conclusion
Appendix: General Social Survey Data on Employee Ownership
So what happened when the accounting rules actually came into full force in 2006? The results indicate the studies described above were fairly accurate-about a third of the companies restricted equity to management levels or above, while the remainder kept the plans broad-based, albeit sometimes with changes in delivery mechanisms or amounts of the awards. ESPPs were less affected, with fewer than 10% of the companies abandoning plans, and about half making changes of some kind, often by shortening or eliminating the look-back period. Stock options, despite predictions to the contrary, did not become compensation relics. They remain the dominant form of equity compensation, albeit many companies are replacing all or part of their options with (most commonly) restricted stock, stock appreciation rights, or performance shares.
This study was completed in late 2005, just as the new accounting standards were about to come into effect (and already had for some companies). It provides a good baseline for where options stood at the cusp of the accounting change. According to the National Compensation Survey by the Bureau of Labor Statistics, in 2005 8% of the work force (about 10 million employees) has "access" to stock options, defined as the right to buy stock at a fixed price for a fixed period of time. This included 12% of white collar, 6% of blue collar, and 2% of service employees. Twelve percent of those making more than $15 per hour had options, while 6% making less than $15 per hour did. Only 4% of employees at establishments with fewer than 100 employees have options, while 14% of those in larger companies did. The 8% number is down from 11% in 2004, consistent with what other surveys had predicted about the reduction in option use in reaction to accounting and other changes. Some of that, however, has been replaced by other forms of equity compensation.
The findings are somewhat ambiguous in that it is not clear if respondents would have interpreted participation in an employee stock purchase plan as an option. The actual number of people having options is probably somewhat (if not a great deal) overstated as a result.
A February 2006 survey of 90 high-tech companies by Culpepper & Associates showed that 38% of the companies cut back on who is eligible for equity-based pay, 3% expanded eligibility to lower levels, and 59% kept their existing penetration. Forty-eight percent of the companies reduced the number of employees receiving stock options, and 44% reduced the number of options granted. One-third of the companies replaced some or all of the options with restricted stock while 19% replaced them with performance shares. Despite a lot of conversation about using stock appreciation rights, only 5% of the companies said they were switching to this approach.
On the ESPP front, 59% of the companies said they were changing their plans, with 26% eliminating the "look-back" feature, 24% reducing the discount, 17% eliminating the plan, and 7% are doing something else with it (the numbers add up to more than 56% because some companies make more than one change).
Copyright © 2007 by The National Center for Employee Ownership (NCEO) (phone 510/208-1300; email nceo@nceo.org; WWW http://www.nceo.org/). All rights reserved.
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