For the first time in 15 years, the country’s largest companies are reporting that they are allocating smaller shares of corporate equity for executives and employee stock incentives, according to the survey. Total allocation fell to 16.36% on average for common shares outstanding, down from the peak of 17.32% seen last year.
The securities industry had the highest average equity allocation on the year at 58.78%, while Energy/Utilities had the lowest at 9.37%. Lehman Brothers had the top allocation of all companies for the second year in a row at 77.26%.
This trend is also expected to continue. “The upcoming proxy season is likely to show a continued trend of reduced dilution, as companies respond to the anticipated costs of mandatory option expensing and investor concerns over equity practices,” said Steven Hall, President of Pearl Meyer & Partners, in a press release.
The report credits this fall to an increase in full-value stock grant usage, which usually requires fewer shares to deliver an equivalent value to employees. Also causing such a change is a greater link between performance and pay, as well as an urge to avoid the new regulations surrounding stock option valuation.
Also falling was the average “burn” – or grant – rate, which now stands at 2.02% of outstanding shares, according to the report. This is down from last year’s 2.21%, and the peak seen in 2001 of 2.69%.
Also falling was the frequency of so-called “mega option grants”, which total over $10 million. For the first time in six years, fewer than half of the nation’s top 200 CEOs (46%) received such awards. A peak of 65% was seen just three years ago, in 2002.
Companies’ annual estimates of the pro forma impact of option use on net earnings also fell on the year. The median decline in such earnings was 4.7%, down from 6.7% in 2003.