Tech Exec Stock Options Short Circuit in the Past Year

The percentage of high-tech executives receiving new stock options (81%) in the most recent year was not the only decline noted. Also on the wane was the total cost to exercise these options, down 27% from the prior year, according to a Culpepper and Associates study.

Overall, a drop in stock prices in the technology industry decreased the total cost to exercise options. Although executives would pay less to exercise these options, a 5% or 10% annual growth rate on lower-priced options yields lower returns than the same level of growth on higher-priced options.

Group Breakdowns

Hardest hit among the high-tech executive group was the IT Services sectors, which recorded a 16%-decline in the number of new options issued and a 14%-decrease in the median total cost to exercise new options. Following this performance were declines in:

• Semiconductor – 10% drop in stock options; 20% fall in cost to exercise
• Software – 4% plunge in stock options; 40% slump in cost to exercise.

Bucking the trend or at least not following the downward drift, was the Hardware sector that saw no change in the number of new stock options issued and a 22%-increase in the total cost to exercise new options.

Declines were also recorded across executive positions. The largest fall was that from the top, as high-tech Chairmen experienced a 17%-drop in the number of chief executives receiving new stock options in the recent year. Further, this group recorded a 32%-fall in the cost to exercise new options. This decline was then followed by:

• Division President – 11% drop in stock options; 12% increase in cost to exercise
• Chief Operating Officer – 11% fall in stock options; 19% plunge in cost to exercise
• Chief Executive Officer – 10% dive in stock options; 40% slump in cost to exercise
• General Counsel – 4% decline in stock options; 12% drip in cost to exercise.

In fact, only the Chief Technology Officers saw no decrease. The group however led all others in the 49% plummet in the cost to exercise stock options.

Alternative Means

Culpepper found evidence that some technology companies may be switching from stock options to restricted stock awards as a possible alternative form of executive compensation. Most notable was the 13% bump in the number of IT Services companies offering restricted stock. This was followed by increases across the board:

• 8% – Hardware
• 5% – Semiconductor
• 5% – Software.

This accumulated to a 9%-increase in the number of restricted stock awards across all sectors.

A more detailed copy of the report can be found at www.culpepper.com .