New Data on Employee Stock Option Trends in High-Tech Companies

A new survey from WestWard Pay Strategies, a San Francisco-based compensation consultant, provides data on overhang, "run rate," and earnings per share impacts of stock options on high tech companies. The study looked at 250 public companies, 50 companies that had an initial public offering (IPO) in the last year, and 20 privately held companies.

Overhang is the potential dilution that would result if all outstanding options were exercised. The median options overhang was 15% for the public companies, 17.4% for the IPO companies, and 10.7% for the private companies. The annual run rate is the average dilution that results from stock options grants over the most recent three year period. The median for public companies was 2.2% and the IPO companies 5.9% (data were not available for private companies).

The earnings per share impact is measured by using the Black-Scholes formula to calculate the present value of option grants on earnings. For the 250 public companies, the EPS impact ranged from 1% to 78%; the median was 6.2%. The median percentage of the value of options relative to total company value was 56.7%.

These numbers all were substantially higher than those in Fortune 500 companies, reflecting the tremendous emphasis on options in the high-tech sector. The fact that these companies have been leading the market's growth in recent years suggest that traditional conservative views about "excessive" option pay strategies, at least in this sector, are overstated.