Benefits April 3, 2007

U.S. Employers Gradually Turning Backs on Employee Stock Plans

April 3, 2007 (PLANSPONSOR.com) - U.S. companies are steering away from stock option plans in favor of expanding their restricted equity award and performance share programs, according to new research from Greenwich Associates.
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The authors of the research say that employers have been gradually moving away from stock option plans as a way to attract, retain, and motivate employees since the Financial Accounting Standards Board began requiring stock options be expensed at their fair market value with FAS123r , therefore increasing the cost of such compensation (See FASB Hands Down Option Expensing Proposal).

While more than half of the respondents (52%) to the survey say they still offer incentive and non-qualified stock options to employees, almost 45% of participants say they have decreased their use of stock options as a result of the new accounting rule – with many of them reserving the options for executives.

About 48% of companies are also offering performance share-based programs and another 15% plan to add them, according to the survey.

Limiting the use of broad-based stock options in favor of a more restrictive, executive-based offering also has something to do with their dwindling effect as an employee hiring and retention strategy, according to Greenwich Associates. Among all companies participating in the study, 78% currently offer restricted award programs.

According to the study, companies have taken the following measures to comply with the FAS 123r:

  • Nearly 45% say they have changed reporting or other processes in order to comply with FAS 123r and nearly a quarter revised their valuation methods in response to the regulation.
  • Only about 10% of companies say they made no changes to internal reporting or valuation processes because they were already in compliance.
  • More than 40% of participating companies say they hired or trained subject experts or brought in external experts.

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