Stock Option Use Continues Decline

October 31, 2006 ( - While a new PricewaterhouseCoopers (PwC) survey found a continuation of the decline in the use of stock option grants in equity compensation practices, stock options still remained the most common type of equity granted by employers globally.

According to the 2006 Global Equity Incentives Survey, over 40% of companies have continued their options plans in spite of new rules requiring expensing of stock options. However, while in 2003 virtually all companies surveyed offered service-based stock options to employees in the US, in 2004 the number of companies who did so decreased to 80% and in 2006 just over 60% of companies said they offer them.

Companies that continue to offer stock option grants said they plan to reduce grant levels or restrict eligibility, the survey report said. Nineteen percent of survey respondents said they are cutting grants to all staff and over 10% said grants were cut for senior management, middle management, or sales and technical staff.

PwC found a similar trend in the use of employee stock purchase plans (ESPPs) by US-based companies. Since the implementation of Financial Accounting Standards Board Statement 123 has created an expense for ESPPs on company balance sheets, the number of US-based companies offering these plans has decreased from 70% in 2002 to 46% in 2006. Among companies based outside of the US, only 23% offer ESPPs, the survey found.

The survey showed that most companies who are planning to replace their stock options plan said they will replace them with service-based restricted stock awards, followed by performance-based restricted stock awards. Since the beginning of 2005, about 4 5% of companies replacing their option plans have replaced them with service-based restricted stock and restricted stock unit grants. By January 1, 2007, nearly 40% expect to do so, according to the survey.

PwC’s findings also show a growing segment of companies (7% to 8% in 2006) that are replacing stock options with service-based stock appreciation rights (SARs). Companies based outside the United States are more than twice as likely as companies headquartered in the United States to include SARs in the mix of equity compensation.

To receive a full report of the results of the PwC 2006 Global Equity Incentives Survey, email or call 720-931-7341.