Stock Option Grants Fall Off in Tech

July 7, 2004 ( - The high technology industry is reducing it use of broad-based stock options as mandatory stock option expensing looms on the horizon.

Across the industry, the use of broad-based stock option grants decreased by approximately 15% to 20%, according to two new studies released by Mellon Financial Corporation’s Human Resources & Investor Solutions (HR&IS).   “Equity Practices Survey for the High Technology Industries” studied 150 US and global firms, while “International Equity Practices Survey for High Technology Industries” studied a subset of these companies.

The reduction in stock options comes as tech companies are managing their stock options based on what they perceive shareholders will allow, rather than from a pure compensation standpoint, by monitoring the “burn rate” of their stock options.   The annual “burn rates” – the percentage of a company’s common shares outstanding provided via stock options to employees – declined 30% in a one-year period.  

Examining these results, David Hofrichter, Mellon’s managing director of global compensation services, says technology firms needs to re-evaluate their compensation practices.   “High technology firms will need to seriously explore alternative methods to reward their high performers and ensure the continuity of their human capital on a go-forward basis,” said David Hofrichter, Mellon’s managing director of global compensation services.

Some tech companies have begun to shift their compensation focus from broad-based stock option grants to the use of more restricted stock.   Mellon found restricted stock is being offered to more levels of employees.   Additionally, several firms replaced option grants with restricted stock in advance of stock option expensing to address shareholder concerns about dilution.

“These findings are among the first empirical evidence of this trend and confirm what we’ve been seeing in our work with high tech firms,” said Ted Buyniski, a Mellon principal and compensation high-technology industry leader. “Companies are quickly reacting to shareholder pressure to cut equity grants in anticipation of expensing.”