Many companies apparently aren't waiting for the Financial Accounting Standards Board to finalize its proposal to force companies to expense stock options against profits before changing their long-term pay packages for executives, according to a survey by Frederic W. Cook & Co.
The report, "The 2003 Top 250: Long-Term Incentive Grant Practices for Executives," finds that whether companies are expensing or not, executive pay is shifting away from stock options toward full-value shares.
"It's clear that the pending FASB regulation as well as continued shareholder pressure and economic uncertainty are prompting companies to rethink their long-term incentive strategies," said Ed Graskamp, managing director at Frederic W. Cook & Co. "We likely will continue to see more companies using a broader variety of vehicles to deliver a more balanced long-term incentive opportunity."
The use of restricted shares for executives has expanded steadily over the last few years, from 43 percent of the top 250 companies in 2001 awarding restricted stock to over half of the companies (54 percent) in this year's study. The use of performance shares and units (long-term cash awards) also increased from last year's levels, according to the report.
For companies expensing options, the percentage of CEO total long-term incentive value delivered in stock options fell to 58 percent in 2003, down from 73 percent in 2001. Among non-expensing companies, the shift is similar but less dramatic, with stock options falling to 71 percent of the total long-term incentive value in 2003, compared to 81 percent in 2001. On the other hand, the value delivered in restricted shares at option-expensing companies rose to 29 percent in 2003 from 17 percent in 2001, while restricted stock value at non-expensing companies increased from 12 percent to 17 percent, the report said.
Companies can currently count options as an expense against profits or may report stock option expenses in the footnotes to the financial statements. In March, FASB released a controversial draft proposal to require companies to expense stock options based on the "fair value" at the grant date.
This week, the board voted to delay by six months implementation of the options rule for public companies, originally planned for fiscal periods beginning after Dec. 15, 2004, to fiscal periods beginning after June 15, 2005. FASB plans to issue a final statement on option expensing by the end of the year.
The report is based on the 250 largest companies in the Standard & Poor's 500 Index as reported in the Special Spring 2004 issue of Business Week magazine.
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