Stock Options Piling Up

October 22, 2000 ( - Large employers are setting aside more stock than ever for equity-based incentive plans, pushing the "overhang" rate - shares set aside for future grants and shares granted but not exercised - to unprecedented levels according to a new study.

Traditionally, public companies have limited the rate of overhang to 10% of common shares outstanding, but that is changing according to the study from consultant William M. Mercer.  The study found that more than two-thirds (67.2%) of large employers had overhangs in excess of 10% in 1999, with a median overhang of 11.8%.  That rate is up from 11.3% in 1998, 10.7% in 1997 and 1996, and 8.7% in 1995.

In fact, a third of the companies studied have overhang in excess of 15%, while another third have overhang between 10% and 15%.

According to Peter Chingos, Mercer’s US practice leader for executive compensation, the growth in overhang results from a growing:

  • use of stock options and other equity-based incentive programs 
  • use of large grants (commonly known as “mega grants”)
  • emphasis on employee stock ownership
  • shift from cash-based to equity-based compensation
  • trend of extending participation in equity-based programs to lower-level employees

Chingos also notes that 1999’s stock market volatility left many options unexercised, contributing to the increase in overhang.

Mercer’s study also revealed significant variation in overhang by industry. Highest median overhang levels were in computers/office equipment (22.5%), diversified financials (17.3%) and electronic/electrical equipment (16.2%). Lowest rates were identified at petroleum refining (8.7%), power utilities (9.3%) and metal products (9.8%).

“Run rates”, shares granted annually as a percentage of common shares outstanding, are also on the rise, with the traditional “1% rule” apparently having fallen by the wayside.  Among the 350 companies studied, median annual equity grants were 1.6% of common shares outstanding in 1999, compared to 1.4% in 1998, 1.3% in 1997, 1.2% in 1996, and 1.1% in 1995.  Run rates also varied by industry, led by healthcare companies with a median rate of 4.1%, followed by computers/office equipment at 3.3%.

The study, Shares Reserved for Long-Term Incentives and Shares Granted at 350 Major Industrial and Service Companies, is based on public corporate documents filed in 2000.