US employers reduce employee stock options

US companies are reducing stock option plans in favour of other types of compensation, according to Connecticut-based financial research firm Greenwich Associates.

While the research does not suggest companies are abandoning stock option programmes entirely, it does show they are significantly scaling back their use of stock options. Almost 45% of the participants said they have decreased their use of stock options as a result of FASB (the Financial Accounting Standards Board) revising its rules in 2004 on the reporting of equity-based employee compensation plans. This ruling requires stock options to be expensed at their fair market value, which has increased the cost of issuing employee stock options.

The research indicates a move away from broad-based programmes to more narrowly focused stock option compensation plans, often limited to company executives.

“It is important to note that restricted award programmes are not the only employee benefits being used as a replacement for - or as a supplement to - stock options,” said Lori Crosley, a consultant at Greenwich Associates. “About 48% of companies are also offering performance share-based programmes, and another 15% plan to add them.”

According to Greenwich Associates, US firms have historically used broad-based stock option grants as a way to attract, retain and motivate employees, and to align the goals of the employees with those of the shareholders. Companies began to reconsider this practice after FASB’s ruling. However, the ruling only accelerated an existing shift by companies away from broad-based stock options. “Since 2000 stock options have failed to perform up to expectations, as companies found that awarding them on a broad basis had little positive influence on hiring or on employee retention,” said Crosley.