Printer Friendly


 WASHINGTON, May 11 /PRNewswire/ -- High-technology companies would see their earnings drop by 50 percent under a pending accounting change governing stock-option expenses, according to a new survey by The Wyatt Company.
 One hundred and thirty-nine companies, including 46 hi-tech firms, took part in the survey. Hi-tech companies, particularly start-up firms with little working capital to spare -- traditionally rely on stock options as a way to attract and motivate workers.
 The survey was fielded before the Financial Accounting Standards Board announced on April 7 that it wanted companies to disclose estimates of the value of stock options for grants made after Dec. 31, 1993, in a footnote to their financial statements. FASB said that option grants made after Dec. 31, 1996, should be charged against earnings. Anticipating FASB action, the survey focused on the impact of such an expense.
 For companies not in the hi-tech sector, the survey found a median reduction in earnings of 5.8 percent. By contrast, hi-tech firms face a median earnings reduction eight-and-a-half times that amount, or 49.5 percent.
 "Many observers believe that the new rule was developed partly in response to concerns about high executive pay," said Matt Ward, a San Francisco-based Wyatt consultant. "But it will end up hurting workers at far lower ranks who benefit from broad-based stock-option plans much more."
 Companies like Du Pont, Merck and Wendy's have broad-based plans for their employees. "But these programs are especially popular among hi-tech firms, precisely those companies that President Clinton says represent the future of our economy," Ward noted.
 The impact of higher stock-option values, broader participation and more significant grant sizes will create a "triple whammy" effect on hi- tech firms under the new accounting rule, according to Ward.
 Using a common formula for valuing stock options known as the Black- Scholes method, the survey found that the median option value at hi-tech companies was 58.8 percent of the actual stock price on the date of the option grant. This compares with a median value of 35.9 percent for other companies. "Stock price volatility is a factor in determining Black-Scholes values, and hi-tech stocks are historically more volatile than other stock groups," said Ward.
 The study also found that hi-tech firms grant nearly five times as many options overall to their employees as do other companies. The median hi-tech firm grants options on 4.535 percent of outstanding shares annually, compared with 1.021 percent for other firms. Even among the non-executive ranks, hi-tech firms grant four times as many shares as other companies.
 Performance Shares May Gain Favor
 Asked about their most likely course of action in response to the stock-option expense rule, most companies outside the hi-tech sector said they expect to do nothing. "Apparently, most of these companies assume that sophisticated financial analysts will look beyond this expense in assessing company performance, value and potential."
 But the numbers appear too large to be ignored by hi-tech firms. "The most likely course of action reported by these firms would be to reduce the number of options granted to participants," said Ward. "Reflecting their continuing belief in the power of stock options, hi- tech firms indicate that they would be reluctant either to reduce eligibility or the frequency of grants."
 So-called performance shares will likely grow more popular because of the new rule, said Ward. Rather than granting options, a performance share plan promises to pay shares of company stock if certain financial or other goals are met.
 Since actual stock is used, companies can grant fewer shares and still deliver the same net value to executives as using stock options. By replacing stock options with performance shares, the median hi-tech company in the survey could reduce annual dilution from 4.5 percent to just 1.4 percent of outstanding shares each year. Use of performance shares would also cut the estimated expense for the median hi-tech company under the pending rule by 53 percent, from $6.4 million to $3.4 million.
 But Ward said that companies must use caution before giving up on stock-option programs. "For one, the FASB rule is still pending," he said. "Under current accounting rules, the value of performance shares must be charged to earnings, while there is no charge for options. Companies should still consider the possibility that the new rule may never come to pass."
 The Wyatt Company is an international human resources consulting firm with 3,400 employees and offices in 69 cities worldwide.
 -0- 5/11/93
 /CONTACT: Bob McKee, 202-508-4848, or Doug Russell, 202-508-4842, both of The Wyatt Company/

CO: The Wyatt Company ST: District of Columbia IN: FIN SU:

KD-IH -- DC009 -- 6967 05/11/93 10:52 EDT
COPYRIGHT 1993 PR Newswire Association LLC
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Publication:PR Newswire
Date:May 11, 1993

Related Articles
The rush for hi-tech stocks.
Option Practices Continue to Shift.
FASTEN SEAT BELTS: Bumpy Ride For Stock Option Accounting.
Option usage: some continuity, some change. (Stock Options).
Employees Undervalue Stock Option Grants by 30-50 Percent, Watson Wyatt Study Finds; FASB Rule Change Will Further Curtail Use of Stock Options.
CEOs See Value of Stock Options Increase Significantly in 2003, Watson Wyatt Analysis Finds.
Expensing Stock Options Already Factored Into Company Stock Prices, Watson Wyatt Analysis Finds; Increase in Option Expense is Associated With More...
Employees, CEOs Saw Stock Option Values Decline Sharply Between 2001 and 2003, Watson Wyatt Study Finds.
Total Stock Option Values Have Declined Sharply Since 2001, Watson Wyatt Survey Finds.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters