IQuantic/Buck Survey Shows Companies Would Cut Back Broad Options if Expensing Required

A new survey by iQuantic/Buck Consultants has found that if the responding companies were required to expense options, over half would make non-exempt employees ineligible for options. The survey was performed in the summer of 2002 and asked companies how they would react if the International Accounting Standards Board's (IASB) proposed rules for stock plan expensing were adopted. The IASB wants to require companies to expense all stock awards, including stock purchase plans and options, at the time of grant based on a present value calculation. 117 companies responded to the survey, 61% of which were in high-technology, 21% in life sciences, and 18% in general industry.

Of the surveyed companies, two-thirds of the life sciences respondents, 52% of the high-technology companies, and 50% of the general industry companies made grants to non-exempt employees, while about three quarters of the technology and life sciences companies, and 43% of the general industry companies, made them available to individual exempt employees. 83% of the high-tech companies have employee stock purchase plans (ESPPs), compared to 58% of the life sciences companies and 52% of the general industry companies.

While most companies reported that they had not yet had formal discussions about how they would react if the IASB proposals were implemented, most respondents believed that expensing stock grants would lead to a change in compensation philosophy, especially in the high tech-sector (72% of these companies said it would, compared to just over 40% for the other companies). 60% of the high-tech companies would make non-exempt employees ineligible for options, compared to 55% of life sciences companies, and 44% of general industry companies. Just over half of both high-tech and general industry companies would make individual exempt contributors (engineers, programmers, sales staff, etc.) ineligible in both general industry and high-tech, while 39% of general industry companies would. Senior executives would not be excluded, and few companies would exclude other top managers. About 80% of all respondents would reduce the total number of options granted. About one-third of all respondents would drop the ESPP programs. About half the companies would consider performance-based options, but less than 25% would consider indexed options (options that only have value of a company does better than its peers or the market).

The results need to be viewed with some caution. Companies might be more restrained in the restriction of option eligibility if, as many people expect, options expensing proves to be less significant to share prices than is often feared. Moreover, in the current somewhat overheated environment, it is easy to say that employees will become ineligible for a benefit, either options or an ESPP, but actually doing the deed will be much harder, causing potentially significant damage to employee morale in some companies. Finally, retaining options for executives while cutting them for rank-and-file employees will create a public relations nightmare while doing little to improve reported earnings. Option grants and ESPPs for non-executives account for less than half of all option awards even in companies granting them broadly; grants to non-exempt employees account for less than 20%.

Copies of the study are available by calling Michael Bendorf at iQuantic/Buck at 415-437-6216.