Survey: Tech Firms Move from Options to Alternative Comp Methods

A Towers Perrin news release said that those employers were mostly reducing stock option grants and increasing the use of restricted stock or stock units.

This is a particularly significant change for technology companies where employers relied heavily on stock option grants to attract and keep the best talent. As recently as three years ago, the industry norm allowed all employees to be eligible for option grants and almost all new employees received an initial option grant at hire.

“We are seeing the beginning of a dynamic shift in the way technology companies are using equity compensation to attract and retain talent,” said Lane Ringlee, principal and senior Executive Compensation consultant in the firm’s HR Services business, in the news release. “As little as two or three years ago, the technology sector’s common practice was to grant all of its employees stock options and most new hires received an initial award. Today, amid new regulations and increasing pressure from institutional shareholders, nearly half of the companies we surveyed use equity vehicles beyond stock options and they are also changing the eligibility requirements.”

New stock expensing rules and shareholder pressure over compensation issues have resulted in many technology companies reducing new-hire option grant levels, mainly for management (20% decrease) and staff (30% decrease). Executive and existing employee grant guidelines have largely remained in line with previous years.

While many companies are seeking shareholder approval to permit grants of stock award vehicles other than option grants, the research found 40% of companies have decided not to change their employee stock purchase plans (ESPPs) regardless of the future expense they’ll incur under expensing rules.

However, more than one-third (36%) continue to be in the “wait and see” mode. To a lesser degree, companies are eliminating their ESPPs or avoiding the expense by going to a safe harbor position that avoids any charge to earnings (5% discount and no lookback feature). Companies that have modified ESPPs most often have cut down the lookback period (71%) and reduced the discount percentage (14%).

More than half (53%) of the companies surveyed are executing exchange rates of one share of restricted stock to nearly three stock options. Half of the participating organizations noted they will reduce the aggregate number of equity shares (in whatever combination of options and whole shares) granted this year; 27% said the aggregate number will remain the same; 10% will increase the aggregate number, and 13% haven’t yet decided. Of companies that have made changes in stock option grant policies, 45% cited expensing rules as the primary reason and another 34% cited pressure from shareholders.

The data were collected in April 2005 from 30 technology organizations with average revenues of $4.4 billion.