Total Stock option values have declined sharply since 2001, Watson Wyatt survey finds

The economic value of stock option grants at the nationís largest corporations shrank by almost 60 percent over the last three years from a total of $118 billion to $51 billion, despite a rising stock market, according to a new study by human capital consulting firm Watson Wyatt Worldwide.

The Watson Wyatt study also found that the economic value (using the Black-Scholes formula) of stock options granted at the typical company declined 64 percent from $103 million in 2001 per company to $37 million in 2004. Last year alone, the value of stock options fell 17 percent. The decline occurred in all major industry sectors, even though the stock market increased steadily. Between 2001 and 2004, the stock price at the typical S&P 1500 company rose 34 percentóand 18 percent in 2004 alone. This decline reflects a drop in the number of employees receiving stock options as well as shrinking grant sizes at all employee levels. The study is based on public data from companies in the S&P 1500.


Year, Media Grant Value of Total Stock Options
2001, $103 million
2002, $64 million
2003, $44 million
2004, $37 million

ìThe results show that the attractiveness of using stock options to reward executives and broader employee groups is diminishing,î said Ira Kay, global director of executive compensation consulting at Watson Wyatt and one of the nationís leading authorities on executive pay. ìIn fact, companies are now replacing stock options with restricted stock and other long-term incentive awards to create a better portfolio of incentives and to comply with the new accounting rule requiring companies to expense options.î

Surprisingly, for the first time since conducting the survey, Watson Wyatt found that companies that provided higher total long-term incentive opportunities to their CEOs over the last five years did not outperform those that provided lower award opportunities. According to the study, companies realized a five-year total return to shareholders of about 10 percent regardless of the size of the opportunity they offered. In previous years, companies that provided high opportunities realized a five-year total return to shareholders that was about double that of companies with low opportunities. LTIs appear at least temporarily to have become less effective due to the bear market from 2000 to 2002 and the use of large stock option grants to executives at underperforming companies.

ìAlthough the last five years have taken their toll on the current power of LTIs, pay for performance still exists,î said Kay. ìDuring this transitional period, the challenge for employers remains to create strong incentives that will keep executives focused on their companiesí future performance. It may be that the design of the stock incentives becomes more important than their size.î

Among the other key findings in the Watson Wyatt executive pay study:

ï Companies with high CEO stock ownership levels had annualized total returns to shareholders of 13.1 percent over the last year, compared with 8.3 percent for companies with lower stock ownership levels.

ï Companies with high actual CEO pay levels also performed better financially, as measured by total returns to shareholders, than those with low actual pay.

ï The number of stock options granted to CEOs declined more than 11 percent last year and by nearly 37 percent between 2001 and 2004.

Distributed by HR Marketer.com