Value of employee stock option grants declines sharply, Watson Wyatt finds

The value of stock option grants at the largest U.S. corporations fell significantly in 2005, as companies cut back on the number of options granted and the number of employees receiving them, according to a recent study by Watson Wyatt Worldwide, a leading global consulting firm. As a result, employees can expect decreased income from options in the future.

In its survey of public data from 793 companies in the SandP Composite 1500, a stock index that includes companies of various sizes in all sectors of the U.S. economy, Watson Wyatt estimated that the total economic value (using the Black-Scholes formula) of stock options granted to all employees declined 71 percent between 2001 and 2005, from $137 billion to $40 billion. This includes a 32 percent decline from 2004 to 2005. The value of stock option grants per company likewise plunged 33 percent, from $43 million in 2004 to $29 million in 2005, with the bulk of this reduction below the executive level.

Estimated Total Stock Option Grant Value for SandP Composite 1500 in billions of dollars

2001 2002 2003 2004 2005
$137 $87 $59 $59 $40

ìCertainly, some reduction in stock option grants from the highs of the technology boom is healthy, but the pendulum may have swung too far,î said Ira Kay, global director of executive compensation consulting at Watson Wyatt. ìStock options can provide powerful motivation for employees to perform. As employeesí potential income from options is reduced and not fully replaced by other programs, employers will have to think creatively to craft other performance incentives.î

Employees have not yet seen the reduction in stock option grants reflected in their total actual pay. In 2005, they cashed out $53.2 million in gains from stock options ó an increase of $6.4 million over 2004. But many of these options were originally granted in 2001 or 2002, when more options were granted more broadly and share prices were lower. Overall, the in-the-money value of unexercised options for all employees dropped from $145 million per firm in 2004 to $105 million in 2005. In-the-money value is defined as the fiscal year-end stock price minus the exercise price of the option times the number of shares held.

Despite the cutback in options, a majority of employees (56 percent) are still generally satisfied with their stock option programs, according to Watson Wyattís WorkUSA 2006/2007 survey of 12,000 employees. However, their attitudes may be changing. Employee satisfaction with stock option programs dropped five percentage points from 2004, the largest decline in any category.

Copies of the Watson Wyatt 2006/2007 Report on Executive Pay and Stock Options and the WorkUSA 2006/2007 survey are available at: