Will Broad-Based Equity Survive Expensing?

Three recent surveys provide information on how companies will react to requirements that options, ESPPs, and other equity awards be shown as an expense on their income statements. The surveys consistently show that somewhat under half of the companies responding plan to cut back the eligibility and/or the size of grants for employees below management levels. On the other hand, very few companies have any intention of reducing eligibility or the size of awards at the senior executive level, and relatively few at the management level. In addition, a third to 45% of the companies plan either to eliminate employee stock purchase plans or change their structure so as to provide lower discounts, eliminate their "look-back" feature, or shorten their offering periods. The ironic result is that the effect of expensing reform could be used by some corporate boards to further concentrate ownership in the hands of a small number of highly paid people.

These surveys need to be viewed with some caution. First, expensing may turn out to be less of an issue than now expected (research points in that direction). Second, the job market could recover, creating the same kinds of labor market conditions that prevailed a few years ago that had companies competing for labor with ownership stakes. It could be very difficult for a company to eliminate its options or its ESPP (or cut back substantially on its benefits) when competitors continue to offer these plans. The surveys indicate that over half of the companies plan to keep their programs intact, a number we expect to end up somewhat higher as the specter of expensing becomes less threatening.

The surveys are:

• Deloitte & Touche, "2003 Technology Stock Compensation Survey: Looking Beyond Options"
• Mellon Financial, "SFAS 123: Responding to Mandatory Option Expensing Human Resources and Investor Solutions"
• Mercer Human Resource Consulting, "Future of Equity: 2003 Update"

A more detailed summary of the data will appear in the NCEO's January/February 2004 newsletter.