Stock Option Values Show Strong Decline

The survey also found that, using the Black-Scholes formula, the economic value of stock options granted at the typical company declined 64% from $103 million in 2001 to $37 million in 2004, according to a Watson Wyatt press release. The decline occurred in all industry sectors in spite of stock market increases.

The decline is attributed to fewer stock options being granted and a decrease in the size of grants that are offered. “The results show that the attractiveness of using stock options to reward executives and broader employee groups is diminishing,” said Ira Kay, global director of executive compensation consulting at Watson Wyatt, in the release. Kay says companies are turning to restricted stock and other long-term incentive awards due in part to the new stock option accounting rule.

The results showed 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 release, the survey found that companies realized a five-year return to shareholders of about 10% regardless of the size of incentive offered.

Other key findings of the survey, according to the release, include:

• Companies with high CEO stock ownership levels had annualized total returns to shareholders of 13.1% over the last year, compared with 8.3% for companies with lower stock ownership levels.
• Companies with high CEO pay levels also performed better financially, as measured by total returns to shareholders, than those with low actual pay.
• The number of stock options granted to CEOs declined more than 11%last year and by nearly 37% between 2001 and 2004.