Compensation; Executives get smaller equity share: survey.

The stock bandwagon appears to be slowing. For the first time in nearly 15 years, America's largest companies reported allocating a smaller share of corporate equity for executive and employee stock incentives, according to a survey of 2004 proxy reports by compensation consultants Pearl Meyer & Partners. In a related development, the rate of grants to employees dipped for a third straight year, approaching stock utilization levels last seen six years ago.

"The upcoming proxy season is likely to show a continued trend of reduced dilution, as companies respond to the anticipated costs of mandatory option expensing and investor concerns over equity practices," said Steven E. Hall, president of Pearl Meyer & Partners.

Total allocations fell to 16.36 percent of common shares outstanding, from a peak of 17.32 percent a year earlier, according to Pearl Meyer's annual survey of equity use among the nation's Top 200 industrial and service companies. The decline was due in large part to more use of full-value stock grants, which generally require the use of fewer shares than options to deliver the same or greater value.

Also fueling changes in equity practices is a move toward creation of a more direct and visible link between executive pay and performance. "Equity grants increasingly include performance hurdles designed to reflect companies' underlying financial performance and long-term shareholder value," Hall said in an announcement.

The average "burn" or grant rate dropped to 2.02 percent of outstanding shares, down sharply from 2.21 percent the previous year and a peak of 2.69 percent in 2001. Even some of the biggest users of equity were not immune: Nearly half of the 20 companies with the highest grant rates in 2004 either maintained or reduced use from a year earlier.

The new equity environment also has prompted an ongoing retreat from so-called "mega" option grants, meaning awards with a face value in excess of $10 million. For the first time in six years, fewer than half of Top 200 CEOS--46 percent--received such awards, compared to a peak of 65 percent in 2002.

In line with the retreat from stock options and changes in option valuation assumptions, companies' annual estimate of the pro forma impact of option use on net earnings declined for the first time since the calculation was mandated by regulators in 1998. The median decline was estimated at 4.7 percent, down from 6.7 percent a year earlier.