The recent Sibson Consulting and WorldatWork survey, The State of Employee Stock Options: 2003, found that option eligibility for professional level workers and higher was relatively flat between 2002 and 2003 while eligibility for lower level workers fell over the year. For example, 50% of sales staff were on the options list this year, down from 67% last year while 27% of non-exempt employees were eligible this year, likewise down from 37% in 2002.
Primarily driving changes to the levels and mechanics of stock option grants in the past 18 months were shareholder concerns, the accounting and public scandals that have touched on some executives getting ultra-lucrative option packages, and internal operational concerns such as employee attraction and retention. Also, all American companies will have to start expensing their stock options beginning in 2005 (See FASB: Option Expensing Begins in 2005 ).
Group, unit, or company performance became an increasingly prominent criterion for determining stock option eligibility in 2003. Nearly a third of respondents (28%) relied on those criteria this year, up from 17% in 2002. “Companies appear to be more actively linking award eligibility to evidence of value creation,” researchers wrote in the report.
The value of employee option grants decreased more for lower-level employees than for their higher-level counterparts. In fact, more than 90% of company had underwater stock options (where the exercise price is above the stock’s current value) at the time of the survey. The average value of total annual compensation represented by stock options increased slightly this year to 20% this year from 16% last year.
Restricted stock seems likely to be used as a long-term incentive vehicle, instead of, or in addition to, stock options in the future. According to the report, about 60% of responding companies will likely be using restricted stock by September 2004 while more than 40% are already doing so.
Finally, there was some inconsistency between the goals of employee stock option plans and those plans’ effectiveness in achieving their goals. Concluded researchers: “Respondents report that their stock option plans are only moderately effective at helping to achieve key objectives such as attracting and retaining talent, focusing employee attention on corporate performance and aligning shareholder and employee interests.”
The survey covered 642 WorldatWork members who responded to an online survey in September and October 2003. The group said the report data is based on the 336 publicly traded respondents.
For more information, go to http://www.worldatwork.org/pub/so903.pdf .