Stock Options Cut in Response to FAS123

July 13, 2005 ( - Employers are cutting back on granting stock options and making reductions in Employee Stock Purchase Plans (ESPP) in response to the Financial Accounting Standard Board's (FASB) revised standard for stock-based compensation, FAS123, according to Deloitte's 2005 Stock Compensation Survey.

To reduce the effect of the new stock compensation expensing standards of  FAS123 , more than 75% of respondents in the survey said they are reducing or had already reduced the number of options granted, according to a news release on the survey.   “The significant advantage of stock options was that companies did not have to expense them, but that advantage has evaporated,” said Mike Kesner, a principal with Deloitte Consulting LLP and leader of the Executive Compensation Practice, in the news release. Forty five percent of those who are reducing the number of stock options granted indicated that reductions would occur below the executive/management level, but 91% have made no change to stock option eligibility for senior executives.

Many employers also plan to make reductions in their ESPP’s.   The survey results showed that only 8% of those that are making changes plan to eliminate their plans.   Fifty one percent said they would reduce stock purchase discounts and/or eliminate or shorten lookback periods.    Almost 30% of public companies said they would conform to the FASB’s strict safe harbor in order to avoid any expense recognition. According to the news release, the safe harbor limits discounts to 5% instead of the current 15% discount allowed and prohibits any lookback feature.

Most companies surveyed, 89% of public companies and 55% of private companies are considering offering alternate forms of equity compensation.   “All forms of equity compensation are now equal, in that they all must be expensed, and companies will need to determine what works best to attract and retain their unique pools of talent – an increasingly complicated job,” Kesner said in the news release.   Fifty two percent chose time-vested restricted stock as the preferred alternate stock compensation, and forty percent chose performance-vested restricted stock.

The survey also showed that most employers (85%) plan to wait until they are required to do so to adopt fair-value expensing.   Seventeen percent had already adopted the new required accounting method, and only 8% plan to before the required effective dates.   Public companies are required to adopt the new method for annual periods beginning June 15, 2005 and private companies are required to for annual periods beginning after December 15, 2005 (See  SEC Makes it Official: FASB 123 Implementation Date Moved Back Again ) .