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.

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.