Study: Stock Option Value Collapsed from 2001 to 2003

December 13, 2004 ( - The value of employee stock options declined drastically from 2001 to 2003, but the blow to CEOs was softened by the increase in value of restricted stock and long-term incentive awards that most regular employees do not receive.

In the stated time frame, the value of stock options declined more than 40%, according to the 2004-2005 Executive Pay Study by Watson Wyatt. For non-executives, the average value of stock options dropped 51%, from $4,196 to $2,037 from 2001 to 2003. For CEOs, the average value of such options dropped 41%, from $3.4 million to $2 million.

The average number of stock options granted during this time decreased by 30%, from 313 shares per employee to 219. The average CEO only saw a 17% drop in shares granted, however.

The shock to CEOs was mitigated by the increase in other payment schemes, however. The value of restricted stock awards rose by 70% in this time frame, while the value of long-term incentive plan increased more than 50%.

Overall however, the average total value of all three payment types decreased by around 33%, from $4.6 million to $3 million.

The study was not all gloom, however, with Watson Wyatt reporting that the rising stock market of 2003 contributed to the nearly tripling of “in-the-money” unexercised stock option value for CEOs from $1.8 million to $5.1 million.

The study also showed that companies with high CEO-stock-ownership levels performed better than those without them. Looking at annualized returns over the past three years, companies with high levels of CEO-stock-ownership had average returns of 8.9%, compared to 5.4% returns for companies with low levels.

The survey looked at approximately 1,000 of the largest companies in the US. Copies of the survey are available here .