The allure of employee stock options may have waned along with the world’s stock markets, but it hasn’t disappeared. In fact, the decline in equity prices may present employees with the best opportunity in years to reap long-term gains from new grants. “Executives’ knee-jerk reaction is ‘give me more cash,’” says Cheryl Spielman, a partner at Ernst & Young International. “But with the downturn, it could be a better time now for options.”
Companies worldwide are obliging. A Towers Perrin study of compensation practices in 22 countries last June found that corporations are increasingly relying on equity-based incentives to attract and retain employees. It also found that options, widespread in Canada, the United States, and the United Kingdom since the early 1990s, are fast becoming the favorite tool for aligning executive and shareholder interests elsewhere. The fastest growth is occurring in such markets as Germany, Italy, Taiwan, and Singapore. “By 2003, a majority of firms worldwide will have long-term incentive plans,” says Towers Perrin consultant Fabrizio Alcobe-Fierro.
Thanks to U.S. influence, these plans are likely to feature stock option programs rather than stock purchase plans or restricted stock awards. As U.S. businesses have expanded their option plans overseas, they have increased the pressure on local competitors and foreign companies to match their offerings. And as non-U.S. companies have built up or acquired operations in this country, they have been forced to play by American rules. “The level of option compensation in the U.S. is much higher than in our home countries,” says Nigel Hurst, North American vice president of human resources at Netherlands- and U.K.-based Unilever, which acquired Englewood Cliffs, New Jersey-based Bestfoods last year. To remain competitive, the company also issues restricted stock to its U.S. executives.
Like all multinationals, Unilever had to reconcile its pay practices in the United States with those in its home countries and in other markets. The pay level is only the most obvious difference among markets; the tax treatment, regulatory requirements, and cultural perceptions of stock options vary widely. It may make intuitive sense to provide incentives with the same terms to employees wherever they work, but in practice it can be costly and inefficient. “Most companies want to have the same plan across different countries, but you’ve got to build in some flexibility,” says Alcobe-Fierro.
The first issue when implementing an options program is to determine how they are to be granted and exercised. Equity-based incentive programs have two fundamental objectives: to align the interests of managers with shareholders and to pay executives based on how well they perform. In the United States, the “plain vanilla” options that virtually all companies offer are given with no strings attached. Granted at the prevailing market price, the options typically vest in three or four years and allow executives to realize the full increase in the share price above the strike price of the options.