CEO Stock Option Values Rise in 2004

As the stock market rebounded from 2003 levels, an analysis by the consulting firm of 63 large public companies found that the value of unexercised stock options from previous grants to CEOs more than doubled in 2004, rising to a median of $29.1 million from $12.8 million.

“Stock price appreciation – not new stock option grants – is clearly the key driver in the increase in the value of unexercised stock options,” said Ira Kay, national director of compensation consulting at Watson Wyatt, in a press release.  “The growth in value masks a steady decline in the issuance of new stock option grants that was prompted by the forthcoming option expensing accounting rule.  Although the decline in new stock option grants has leveled off, it is unlikely that we will see another large increase in the value of unexercised stock options unless the stock market has a stellar year.” 

The study also found a link between a company’s stock performance and executive pay. Among the high-performing companies, the median value of unexercised stock options rose from $16.2 million to $43.5 million on the year, while low-performers saw a smaller increase of $10.7 million to $15.3 million.

Watson Wyatt attributed the still significant gain by lower-performing companies to highly leveraged stock options, which caused a small stock price increase to lead to a large increase in value.