In preparation for mandatory stock option expensing, nearly three-quarters of large companies are revising or planning to revise their long-term incentive program designs, according to a survey of 115 companies by Hewitt Associates.
More and more companies are shifting from issuing stock options to providing restricted stock and other forms of stock-based compensation, the consulting firm found. Forty-three percent of the companies it studied are moving pieces of their long-term incentive mix from stock options to restricted stock, while 33 percent are changing portions of their options offering to performance-based shares or units.
“As corporate boards come under increasing scrutiny from shareholders and regulators, they’re shifting more executive pay to performance-based equity, which has a greater focus on long-term results,” said Tracy Davis, senior consultant for Hewitt Associates. “Moving forward, we expect this to have a major impact on executive earning potential, as a growing portion of their pay will be determined by their success in achieving long-term business goals and how well they meet shareholder expectations.”
At the same time, when companies switch to other forms of equity incentives, they’re not fully replacing stock options grants. About 40 percent of companies are using a 3-to-1 value ratio when converting from options to restricted stock, and a 4-to-1 ratio when converting them to performance-based shares, according to Hewitt. The consultants note that a minority of companies are fully replacing stock option values when they move to other forms of incentive pay.
Further, many companies are scaling back long-term plans altogether: According to the Hewitt study, 35 percent of companies are limiting the number of employees eligible for long-term incentive plans.