Driven by legislative and accounting changes, 2004 saw some of the biggest shifts ever seen in executive compensation, according to human resources services consulting and outsourcing firm Hewitt Associates.
In particular, stock option grants took a nosedive. While stock options accounted for nearly 50 percent of total compensation for a Fortune 100 senior executive two years ago, today they account for just 31 percent of such compensation, according to a Hewitt analysis.
Hewitt said that companies are significantly decreasing the number of stock options offered to executives in their long-term incentives, while increasing the use of restricted stock and performance-based equity plans. Nearly half of companies (48 percent) offered time-based restricted stock/restricted stock units as part of annual long-term incentive grants in 2004, up from 29 percent in 2002.
Multiyear performance plans tied to company financials and stock price have also grown in popularity -- a trend that Hewitt predicts will continue, as questions are raised about time-based restricted stock. Half of companies now have performance share or performance unit plans in place, up from 42 percent in 2002.
"Restricted shares are less dilutive than stock options. There's also a perception by some legislators and shareholder groups that too much emphasis on options may result in short-term or risky decisions designed to drive up stock price at all costs," said Hewitt senior consultant Tracy Davis. "That said, time-based restricted stock is tied to continued employment only, so delivering a high percentage of long-term incentives in time-based stock is not consistent with a 'pay-for-performance' philosophy. Therefore, as companies continue to use restricted stock, it's critical they consider adding performance metrics."
Hewitt also said that fewer manager- and director-level employees were awarded long-term incentives in 2004. Only one-third of employees at those levels received stock options or other forms of long-term incentives this year, down from one-half in 2003.
Davis said that cost, due to dilution and new accounting rules, is forcing many companies to reduce the number of employees receiving equity-based incentives. "In these cases, our experience is that companies are not completely replacing this value with other forms of compensation," Davis noted.
"We expect more companies to shift toward a 60/40 long-term incentive balance between stock options and other equity vehicles at the executive level," said Davis.
