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Over the past year
there has been much speculation about the future of
employee stock options. Whereas it is likely that there
will be substantial changes in the option granting
landscape, it is highly unlikely that options will be
abandoned as a means of attracting, retaining and
motivating key employees and executives. As you know,
options have been used for many decades by start-up
companies and for executive compensation. If you go back
to the 80's this is how options were used. Then, in the
boom years of the mid and late 90's the option
population exploded from one million to more than ten
million, as companies jumped on the option band wagon
and issued options to rank and file employees. This
feeding frenzy abruptly came to an end in 2001, and
started to reverse itself. To get a glimpse into what is
most likely to happen with option grants, turn back the
clock ten years or so. In other words, what we are most
likely to see is a return to the norm. In this paper we
outline what we think is likely and unlikely to
happen.
What is likely
- It is likely that the number of option holders
will diminish over the next several years. This will
result from companies eliminating grants to rank and
file employees and as the same employees exercise and
sell their current option holdings.
- It is likely that expensing of options will become
mandatory by 2005, but it is not a done deal. H.R.
1372 (Broad-based Stock Option Plan Transparency Act
of 2003) would bring a three-year hiatus to the
expensing of stock options and has significant
support. In the December 1, 2003 edition of Business
Week, Intel CEO Craig R. Barrett is quoted as follows:
"The economic harm of stock-option expensing cannot be
overstated. At stake is the future strength and
vitality of the American economy."
- It is likely that many companies will re-examine
their equity compensation programs. In fact, this
process is well underway. It is also likely that many
of these companies will provide restricted stock in
addition to options, thus complicating the planning
issues facing executives.
What is
unlikely
- It is unlikely that start-up and growth oriented
companies will discontinue issuing options to
executives and key employees. Options are a uniquely
powerful tool for recruiting and motivating talented,
risk oriented employees who are willing to work long
hours to make these companies succeed. Any company
that needs this type of talent will grant them options
or risk a talent drain. Since expensing of options
doesn't impact start-up companies who aren't yet
profitable, these companies will be the drivers of
continued option granting.
- It is unlikely that equity based compensation will
decrease as a percent of total executive pay. In spite
of shareholder concerns over large option grants, they
are even less pleased with large cash awards.
- It is unlikely that the need to provide training,
planning, and implementation services to key employees
and executives will diminish. With increasing
shareholder pressure on equity compensation, companies
will turn to enhanced education and planning programs
to ensure that these programs provide shareholders
with maximum retention and motivation benefits.
We will actively follow all of these
developments in equity compensation and will update our
ESO education and planning offerings accordingly. In the
meantime, for other articles and perspective on employee
stock options visit: http://www.mystockoptions.com/home/home.cfm.
As always, if we can be of any assistance in the areas
of stock option education and planning, do not hesitate
to give us a call at 541-383-3899. Happy
Holidays!
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