Human Capital & Careers

Option Plays Dwindle in Pay Mix

With shareholders opposing outsized enrichment for executives, stock options are gradually giving way to restricted stock in compensation packages.
David McCannSeptember 6, 2013

Large companies are continuing a recent trend of being more conservative with their stock-based compensation for employees, a new analysis by PricewaterhouseCoopers shows.

At the 110 “mature” companies studied, stock options accounted for 49 percent of equity shares granted in 2012. That left 51 percent of the shares in the form of restricted stock, which often requires only that the employee stay on the job for a certain length of time in order to be vested in the award.

In 2008 and 2009, restricted stock respectively composed just 36 percent and 31 percent of equity awards at mature companies. The following year was an outlier, with more than two-thirds of equity awards made in restricted stock. At that time executives’ taste for options had sunk, as the recession had rendered many earlier-granted options out of the money and talk of a possible second dip for the economy was rampant. But the long-term trend is a gradual decline in options as part of the compensation mix.

Among 46 high-tech/emerging companies that PwC studied, stock options still accounted for a majority (58 percent) of shares granted in 2012. But that was a meaningful drop from any year in the 2008-2011 period. In 2011, for example, options made up 66 percent of equity awards at such companies. That’s a notable shift, because stock-compensation expense typically eats up a large percentage of earnings at high-growth companies (28 percent in 2012, for example).

Executives ordinarily see stock options as a superior form of compensation compared to restricted stock, because they have a chance to score a big payout by exercising the options when the share price reaches a peak level compared with the grant-date price. But investors have increasingly become uncomfortable with option awards, and that’s driving the trend toward restricted stock.

Since the credit crisis began driving down stock prices in mid-2007, shareholder advisory firms and other investor groups “haven’t been thrilled with employees receiving options that allowed them to get an outsized return compared to other shareholders” if a stock’s price rose considerably, said Ken Stoler a partner in PwC’s human resources accounting advisory practice. “They want to better align shareholders’ interests with employees’ interests, rather than letting employees get an exponential reward just because they’re holding options,” he says.

They also want to make it tougher for executives to benefit from their restricted-stock awards. Stoler says PwC research has identified an uptick in companies basing the vesting of restricted stock on company performance standards, in addition to the usual time-based requirement.

In one respect the clamp-down on options is curious, because they clearly can be a more effective motivator of executives’ behavior than restricted stock. If that behavior causes the share price to rise, investors benefit too. But shareholders increasingly have a share-alike mindset that’s pushing companies to seek a balance between motivating people to get the stock price moving up and limiting their reward for doing so, says Stoler.