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U.S. Employers Reduce Use of Stock Options in Favor of Other Compensation Alternatives
( Greenwich Associates )
(April 3, 2007)

Tuesday, April 3, 2007 Greenwich, CT USA - New research from Greenwich Associates reveals that U.S. companies are altering the composition of their equity-based employee compensation plans by adopting and expanding restricted equity award and performance share programs while scaling back existing stock option plans.

Historically, companies have used broad-based stock option grants as a tool for attracting, retaining and motivating employees, and for aligning the goals of employees and shareholders. Companies began to reassess this practice after the Financial Accounting Standards Board revised its rules on the reporting of equity-based employee compensation plans (FAS 123r). By requiring stock options to be expensed at their fair market value, this rule change has the effect of increasing the cost of issuing employee stock options.

Despite this new expense, nearly 52% of the companies participating in Greenwich Associates' Equity Compensation Plan Research Study say they continue to offer incentive and non-qualified stock options to certain employees. However, the new research reveals that companies have begun to reduce their reliance on stock options in favor of other offerings. While the data does not suggest that companies are scrapping stock option programs entirely, there is ample evidence that companies are scaling back their use of stock options significantly. Almost 45% of the study participants say they have decreased their use of stock options as a result of FAS 123r. In many cases, companies appear to be reducing the scope of their stock option plans as part of a move away from broad based programs to more narrowly focused stock option compensation plans, often limited to company executives.

The shift away from broadly issued options to restricted award programs was already underway before the implementation of FAS 123r - the rule change only served to accelerate this move. "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 employee retention," says Greenwich Associates consultant Lori Crosley.

Restricted award programs seem to be the most popular alternative for companies trying to limit their use of options. Among all companies participating in the study, 78% currently offer restricted award programs. "It is important to note that restricted award programs are not the only employee benefits being used as a replacement for or as a supplement to stock options," says Lori Crosley. "About 48% of companies are also offering performance share-based programs and another 15% plan to add them."

The data suggest that companies are getting a mixed reaction to these changes from employees. As Lori Crosley observes, "According to study participants, their employees are split in their response to these shifts, with 45% of companies saying their employees had a positive reaction to the switch away from options and 41% reporting a negative response."

FAS 123r Compliance Alters Reporting Practices and Valuation Methods
Nearly 45% of participants in the Greenwich Associates study 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 with the requirements imposed by FAS 123r.

As part of the compliance process, more than 40% of participating companies say they hired or trained subject experts or brought in external experts. As Lori Crosley explains: "Anticipating the need for FAS 123r consulting, some equity outsource providers have added FAS 123 expertise through strategic acquisitions (Merrill/Equity Methods) and/or partnerships (Smith Barney/EASi) in order to better advise clients on the implications of rule changes and the development/enhancement of reporting capabilities."

For more information contact:
Joan Weber
+1 (203) 625 4354
jweber@greenwich.com

Greenwich Associates is the leading international research-based consulting firm in institutional financial services. Greenwich's studies provide benefits to the buyers and sellers of financial services in the form of benchmark information on best practices and market intelligence on overall trends. Based in Greenwich, Connecticut, with additional offices in London, Toronto, and Tokyo, the firm offers over 100 research-based consulting programs to more than 250 global financial-services companies. Please contact us for further information or to arrange an interview with one of our consultants. You can visit our website, www.greenwich.com, for more information.

 

 

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