Survey: Large Companies Preempting FASB Stock-Option Rules

October 13, 2004 ( - Preempting possible Federal Accounting Standards Board (FASB) regulations on stock-options expensing, many of the nation's top companies are already changing the design of their long-term incentive packages.

A survey by Frederic W. Cook & Co. shows that many of the nation’s top 250 companies, wary of pending regulation that would force companies to count options as an expense against profits, have begun to change compensation design. The survey found that executive pay is shifting away from stock options toward full-value shares in delivering long-term incentive compensation in response to the pending FASB action.

The survey (entitled ‘The 2003 Top 250: Long-term Incentive Grant Practices for Executives’) also found that there has been a steady expansion in the implementation of restricted shares for executives over the last few years. In 2001, 43% of the top 250 companies awarded restricted stock; in this year, 54% of these companies offered restricted stock. The use of performance shares and units (long-term cash awards) also increased from the previous year’s levels.

Regarding option expensing companies, the percentage of CEO total long-term incentive value delivered in stock options has fallen since 2001, from 73% to 58% currently. The shift is less significant among non-expensing companies, where stock options fell from 81% to 71% from 2001 to 2003. On the other end, the value delivered in restricted shares at option expensing companies increased to 29%, up 12% from 2001. For non-option expensing companies’, restricted stock value increased to 17%, up 5% from 2001.

Chief executive long-term incentive value may be creeping back up slightly from 2003 to 2004 as well. Median long-term values fell by 11% at option expensing companies and 19% at non-option expensing companies between 2001 and 2003.

“Even though the FASB stock expense regulation is not final and Congress still is considering legislation to weaken it, many companies already are expensing stock options,” said Justin Fossbender, the author of the report, in a press release. “The long-term incentive practices that these early adopters to the FASB proposal are putting in place, ranging from a greater reliance on full-value shares at high tech leaders like Microsoft to increased use of stock appreciation rights at financial market giants like Merrill Lynch, seem to be the wave of the future for Corporate America.”

These trends can be viewed best in the light of recent FASB action regarding stock-option expensing (See The Bottom Line: Expensing Proposition ). The nation’s accounting rulemaking body has been working for a solid year on adapting the rules that would require companies to count options as expenses against profits.

This is the 32 nd annual survey on this subject by Frederic W. Cook & Co. The survey is based on the largest 250 companies in the S&P 500, based on market capitalization. The complete survey is available at _250_09.04.pdf .