Value of New Stock Option Grants Declined Nearly 10%

December 9, 2009 (PLANSPONSOR.com) - U.S. employees saw the fair value of their new company stock option awards decline by nearly 10% last year, according to a recent analysis by Watson Wyatt.

The Watson Wyatt analysis found that, for the 643 Fortune 1000 companies that reported on new option grants in 2007 and 2008, the disclosed fair value of those grants fell by a median of 8.8% in 2008, compared with a 1.7% decrease in 2007. On aggregate, the total fair value for all the companies fell from $26.8 billion to $23 billion, a decrease of 14.2%.

While the impact of economic conditions played a role, “[s]ome of this option decline is due to the continuing shift away from these awards to other equity vehicles such as performance shares,” said Steven van Putten, senior executive compensation consultant at Watson Wyatt, in the press release.

Overall, for the 903 Fortune 1000 companies that reported expense in both 2007 and 2008, total stock compensation expense increased by a median of 2.4% in 2008, compared to an increase of 10.1% in 2007. These compensation increases, however, are partly due to the transition provisions of Financial Accounting Standard 123(R), “Share-Based Payment,” the press release said. Watson Wyatt explained that although these provisions were first effective for the 2006 fiscal year, companies are only now starting to have a full cycle of awards reflected in their expense.

In aggregate, these 903 companies experienced a total stock compensation expense decrease from $63.6 billion in 2007 to $58 billion in 2008, a fall of 8.8%.

Industries with the steepest drops in the value of new option grants included education (-37.5%), property and construction (-25%), transportation (-20%), and health care (-15.9%). Other industries with steep drops were financial services, retail, and high technology. 

More information about the analysis is at www.watsonwyatt.com/fas123.

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