Human Capital & Careers

Tech Companies Scaling Back Options

Rather than focusing purely on pay, tech companies are basing their total option grant programs on ''what they perceive shareholders will allow.''
Stephen TaubJuly 8, 2004

During debates on expensing the value of options granted to executives and employees, tech companies may be acting tough, but behind the scenes they’re quietly getting with the program.

According to two studies by Mellon Financial Corp., the high-technology industry has decreased its use of broad-based stock option grants by about 15 percent to 20 percent. In addition, the Mellon studies found that annual “burn rates” — the percentage of a company’s common shares outstanding provided via stock options to employees — declined 30 percent in a one-year period.

“These findings are among the first empirical evidence of this trend and confirm what we’ve been seeing in our work with high-tech firms,” said Ted Buyniski, a principal with the financial services company, in a statement. “Companies are quickly reacting to shareholder pressure to cut equity grants in anticipation of expensing.”

“The majority of these high-tech firms are now managing their broad-based stock option programs to a burn rate target,” added Buyniski. “Rather than taking a purely ‘pay’ perspective, they are basing the total option grant program on what they perceive shareholders will allow.”

In lieu of options, the studies found, restricted stock programs are becoming more common, and restricted stock is being offered to more levels of employees. In fact, pointed out Mellon, several companies replaced option grants with restricted stock before expensing rules took effect in order to address shareholder concerns about dilution.

Mellon also noted that global companies are establishing separate local guidelines that reflect each region’s perception of the value of stock options and the supply-and-demand issues of the local labor market.

Understanding Which ERP Modules Your Business Needs – And When