Ridgefield Park, N.J. (July 9, 2004) -- Whether or not technology companies support the mandatory expensing employee stock options, they seem to be preparing for its arrival by cutting their use of broad-based stock option grants, according to research by Mellon Financial Corp.


The high-tech industry has decreased its use of broad-based stock option grants by approximately 15 percent to 20 percent, according to two studies by Mellon Financial's Human Resources & Investor Solutions business.


"These findings are among the first empirical evidence of this trend and confirm what we've been seeing in our work with high-tech firms," said Ted Buyniski, a Mellon principal and compensation high-tech industry leader. "Companies are quickly reacting to shareholder pressure to cut equity grants in anticipation of expensing."


Annual "burn rates," defined as the percentage of a company's common shares outstanding provided via stock options to employees, fell 30 percent in a one-year period, Mellon's "Equity Practices Survey for the High-Technology Industries" and "International Equity Practices Survey for High-Technology Industries" studies found.


"The majority of these high-tech firms are now managing their broad-based stock option programs to a burn rate target," Buyniski said. "Rather than taking a purely 'pay' perspective, they are basing the total option grant program on what they perceive shareholders will allow."


Mellon reported that restricted stock programs are increasing, with restricted stock being offered to more levels of employees. In addition, Mellon said that several firms replaced option grants with restricted stock in advance of stock option expensing to address shareholder concerns about dilution.


The studies found that global firms are "localizing" their option grant practices. Rather than follow global guidelines, companies are establishing separate local guidelines that reflect each region's perception of the value of stock options, and the supply and demand issues of the local labor market.


-- WebCPA staff

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