Stock Overhang On The Rise

October 30, 2002 ( - Stock overhang continues to increase, while the number of companies with "evergreen" reserves is on the decline, according to a recent Mercer report.

Stock overhang reached 15.0% in 2001, up from 13.3% in 2000.   Plans with “evergreen” reserves decreased to 13.3%, down from 14.4% in 2000.   Additionally:

  • 71.0% of those surveyed have overhang greater than 10%
  • 43.4% of those surveyed have overhang greater than 15%
  • 21.4% of those surveyed have overhang greater than 20%

Stock overhang is the sum of shares reserved for outstanding grants plus shares available for future grants as a percentage of common shares outstanding.

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The increase in overhang can be attributed to the move from cash-based compensation to equity-based compensation, resulting in larger and broader stock option grants, says Mercer.   Shares granted annually as a percentage of total shares outstanding has increased to 2.0% in 2001 versus 1.8% in 2000.

There is a wide overhang variance by industry.   Diversified financials show the highest median overhang levels (36.8%) with Insurance reporting the lowest (9.9%).

However, amendments to FAS 123 could signify change.   “If companies are required to expense their stock options, we’ll see a quick and dramatic reduction in the use of traditional stock options in favor of other forms of incentive pay”, according to Peter Chingos, who leads Mercer’s executive compensation consulting practice in the US.

The study “Shares Reserved for Long-term Incentives and Shares Granted at 350 Major Industrial and Service Companies” reflects information from fiscal year 2001 as reported in annual reports and proxy statements.