Report: Equity Awards to Workers Dropping

October 30, 2006 ( - Leading US companies trimmed corporate overhang for a third straight year to a median of 12.9% of common shares outstanding, the lowest total stock level since 2001, according to a new study.

The 2006 Equity Stake Report from compensation consultants Pearl Meyer & Partners found a corresponding sharp drop in new equity awards to employees, to 1.06% of shares outstanding, according to a news release. Some 96 of the companies – twice as many as two years ago – reported utilizing 1% or less of outstanding shares for stock-based incentives in the 2005 fiscal year.

Meanwhile, only six companies reported burn rates of 5% or more, compared with 20 companies five years earlier, the study found.

In terms of total allocations, nearly half of the companies studied had overhangs between 7.5% and 15% of outstanding shares, about the same proportion as the previous year. However, reported overhangs below 7.5% increased from 18 to 29 companies, while the number of overhangs between 15% and 30% fell from 78 to 66 companies, according to the consultant firm’s data.

Employee Stock Grants Down by More than Half

Over the past five years, the proportion of corporate shares utilized annually for new stock grants to employees has declined by more than half, the consultant’s analysis of 2006 public filings found.

That is for good reason, according to the consultant. “Companies today know they must be both more frugal and more strategic about utilizing corporate equity in compensation programs,” said Jannice Koors, managing director of Pearl Meyer & Partners, in the news release. “Along with longtime investor concerns about high dilution, there are new considerations regarding the cost of mandatory option expensing and the impact of more detailed proxy disclosure.”

Along with generally reduced equity use, companies continue to increase their use of restricted stock and reduce dependence on stock options to promote equity ownership.

Over the past six years, the proportion of shares allocated for restricted stock grants has increased tenfold as a percentage of all shares granted each year, while shares used for stock option awards have fallen by nearly half. Thirteen companies reported that they granted no employee stock options during 2005.

All but 88 of the Top 200 companies studied adopted option expensing during fiscal 2005, compared to 136 non-adopters the previous year.