Human Capital & Careers

FAS 123R Reining in Tech Options

A new survey of large U.S. technology companies finds that 53 percent have begun using a mix of alternative compensation plans this year.
Stephen TaubJuly 21, 2005

In response to stock-option expensing rules, technology companies are rapidly diversifying the equity compensation they award to many employees, according to a new study by Towers Perrin.

The survey, which included 30 of the nation’s largest technology companies, found that 53 percent have begun using a mix of alternative compensation plans this year, mostly reducing stock option grants and increasing the use of restricted stock or stock units.

Traditionally, of course, tech companies have been the most liberal users of stock options as a tool to attract and retain key employees. Many of them mounted an aggressive campaign opposing the Financial Accounting Standards Board’s revised rule on stock-option expensing, Statement 123R, which requires most public companies to expense options beginning with their first fiscal year starting after June 15.

As recently as three years ago, the industry norm allowed all employees to be eligible for option grants, and almost all new employees received an initial option grant when they were hired, according to Towers Perrin. In addition, at a fixed time each year, employees would be considered for supplemental “replenishment” option grants, usually based on their individual performance, the consulting firm pointed out.

However, FAS 123R has apparently reined in these practices.

Many technology companies have begun reducing option grants for new hires by 20 percent for newly hired managers and by 30 percent for staffers, according to the consulting firm. The guidelines for option grants to executives and to other current employees “have largely remained in line with previous years,” it added.

Towers Perrin also found that 40 percent of companies have decided not to change their employee stock purchase plans; 36 percent are in a “wait and see” mode. Of those companies that did modify their plans, 71 percent decreased the look-back period, and 14 percent reduced the discount percentage, according to Towers Perrin.