Option usage: some continuity, some change. (Stock Options).

It goes without saying that many stock option programs are under a microscope these days. Reports of huge option grants to CEOs of under-performing companies and speculation that option programs helped accentuate corporate reporting fraud have created a climate ripe for change. While expensing of stock options is still voluntary, many corporate governance experts think rules mandating such expensing are practically inevitable.

In this environment, when many option programs--especially at high-tech companies--are underwater, WorldatWork and Sibson Consulting developed a research study last year to determine how the use of options has changed in the past few years. WorldatWork and Sibson, a division of the Segal Co., analyzed results from about 300 respondents in public companies.

The survey produced a series of mixed responses. Companies reported that the goals of their option programs--employee attraction, retention and motivation--haven't changed, nor have the major external shocks of the past year, such as the corporate governance scandal and continued stock market woes, triggered many changes in option plans. Even companies watching their stock prices continue to drop have not altered the usage pattern for employee stock options.

However, companies are clearly tying stock option grants to individual and corporate performance, rather than providing across-the-board grants to all workers of certain classes of employees, the survey revealed. And while companies surveyed awarded about the same number of options in 2002 as in 2000, the overall value of the options granted was lower last year. In fact, the survey showed, the percentage of pay represented by options has remained stable over the past few years, standing at about 15 percent of total compensation, with the value determined by either the Black-Scholes method or fair market analysis.

Of firms using options in 2002, 98 percent of executives, 86 percent of middle managers and 37 percent of administrative personnel were eligible for options, the survey found. The median percentage of employees receiving options at those firms was 12 percent in 2002, and 13 percent of firms provided at least some options to all employees.

The tables on this page summarize specific responses to questions raised in the survey. All of the respondents were U.S. companies, ranging in size from less than 1,000 employees to more than 10,000. More than a dozen industry categories were represented, with manufacturing (25 percent) and high-tech (19 percent) the largest; no other category had more than 9 percent.

Change in Organizational Use of Certain Option Types, 2002

                                    More  Less  No Change

Performance-contigent options        33%    4%     63%
Options price at fair market value   16     6      78
Performance-accelerated options      12     6      82
Premium-priced options               7      0      93
Discounted options                   7      4      89

Eligibility Determinants for Stock Option Grants,2002

                                     Yes  No

Salary grade or level                76%  24%
Individual performance               67   33
Employee category
(manager, professional, non-exempt)  67   33
Discretion of company leadership     65   35
Individual value in labor market     23   77
Group, unit, company performance     17   83

Use of Options by Industry


Manufacturing              86%
Wholesale/Retail Trade     91
Finance/Banking            100
Insurance                  92
HealthCare                 60
High Tech                  98
Business Services          85
Transportation             75
Utilities                  100
Oil/Gas/Natural Resources  100
Construction/Real Estate   100
Publishing/Newspaper       100
Communications             100