According to the 2005 Global Equity Incentives Survey by PricewaterhouseCoopers (PwC), companies are still using options as their primary reward vehicle, but many are adding performance-based standards, are restricting employee eligibility for those plans, and are cutting the overall number of options awards.
The reduction in overall grant levels is the most immediate response to the new accounting regulations with 56% of respondents indicating that grant levels will be reduced. Specifically, 16% of companies will reduce grants to all staff, 16% to individual contributors, and 36% to middle managers and above, while 32% do not yet know what they will do.
PwC researchers said cutting option grants may be easier at senior management levels, while still allowing the company to reap the benefit of the grants as motivation or retention tools – a task made noticeably more challenging at lower levels in the organization since grant levels are already smaller there. Beyond the impact on their American workforces, companies are also thinking of reducing the number of foreign locations to which they extend equity plans, PwC said.
The challenge of coping with options expensing (See SEC Makes it Official: FASB 123 Implementation Date Moved Back Again ) is coming at a time when the popularity of existing plans is reaching all time highs, according to PwC. Especially as stock markets improve, stock option and employee stock purchase plans regain much of their power as retention and attraction vehicles.
Over 85% of participants indicate that employees are satisfied with their current plans (mostly stock option plans). Participation in discounted stock purchase plans (ESPP) is trending up worldwide and, US-based ESPPs reached a survey high: a significant number of companies claim uptake rates between 50% and 75%. Commented the PwC researchers: “Companies need to determine if the accounting expense of ESPPs warrant their elimination, especially when employees participate or value this benefit.” New expensing requirements are expected to reduce the incentive for such programs (see Companies Implementing ESPP Changes ).
Recipients apparently aren’t the only ones high on equity incentive programs, according to the study. In fact, a majority of HR professionals in the study said they believe that current equity plans have achieved their initial goals and that the investment in them is money well spent.
But increased regulatory and shareholder scrutiny is a reality not only in the US, but around the world, PwC found. Plan administrators selected tax and regulatory compliance of stock plans as their number one challenge.
While administration and process was cited as the second most prevalent obstacle to global equity programs, survey responses indicate that companies are generally satisfied with their administrator or plan software. Some 72% of this year’s participants indicate that employees access their plan records via the Internet, 64% report that award agreements are delivered via the Internet, and over half report that employees indicate acceptance of awards electronically, PwC said.
Plan communication was identified as the third most challenging aspect of global equity plans, the survey found. Messages from top executives, e-mail, local meetings with HR and the company intranet all rated as more effective than printed brochures for this year. Nearly 67% of respondents report that their employees understand their benefits relatively to extremely well. PwC said.
The PwC survey was conducted between September and November, 2004. Internet questionnaires were completed by 131 multinationals headquartered in 16 countries worldwide.