Human Capital & Careers

New Designs for Options Plans

About 40 percent of companies in a new study either eliminated or reduced option use, trimmed participation, or restructured their program.
Stephen TaubMarch 23, 2004

As the Financial Accounting Standards Board moves closer to requiring that companies expense the value of stock options, more and more large businesses are moving away from this form of compensation for their top.

In a study by compensation consultancy Pearl Meyer & Partners — which examined 50 early proxy filers with average revenues of $22.5 billion that had the same CEO in 2002 and 2003 — about 40 percent of the companies made significant changes in their option programs. They either eliminated or reduced option use, trimmed participation, or restructured their program.

Nearly one-third of the companies increased their use of restricted stock. In some cases, they partly or totally substituted restricted stock for stock options grants. In fact, a number of companies that did not grant restricted stock a year ago made multimillion-dollar grants to their CEOs; others doubled their previous year’s awards.

In addition, 16 percent of the companies introduced or increased executive stock-ownership guidelines, including several companies that imposed mandatory share-retention requirements for equity awards.

Pearl Meyer found that stock option values peaked at 57 percent of CEO pay in 2002. They have come way down since then, due in part to the expectation that options will soon be expensed as well as overall corporate governance concerns, the consulting company found.

More specifically, the company found that the value of stock awards to large-company CEOs doubled in 2003 to $2 million. Salary climbed 6 percent, to $1.1 million, and bonuses jumped 23 percent, translating into a 17 percent increase in total cash compensation.

In addition, the value of long-term incentives rose 13 percent, to $313,450. On the other hand, stock options dropped one-third in value, to $4.7 million. Since many of the options were granted earlier in the year, the lower value reflects lower share prices at the beginning of 2003. Also, fewer shares were granted.

The upshot: Total CEO remuneration fell 8 percent, to $10.3 million, according to the study.

Other findings:

  • Nearly 20 percent of the companies made changes to their annual incentive plans, most often through expanded bonus opportunities or increased performance measures.
  • More than one-third made changes in their director pay programs; most increased compensation.
  • One-quarter submitted new or amended equity plans for shareholder approval.
  • 24 percent adopted option expensing.