Equity Compensation
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Table 1: Penetration Changes in Equity-Based Compensation Plans |
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Penetration of Plan |
Percent of Companies |
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Maintain current penetration levels |
59% |
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Restrict to higher job levels than before |
38% |
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Expand to lower job levels than before |
3% |
Calculating Stock Option Value for
Expensing and Employee Communications
The Black-Scholes option pricing model is the most commonly used
method of calculating the value of employee stock options. Eighty-seven
percent of companies use this method for purposes of expensing
options (Table 2). Nearly all companies use the same valuation method
when reporting the option expense on financial statements and
communicating the value of the options to employees.
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Table 2: Method of Calculation Stock Option Value |
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Method |
Percent of Companies |
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Black-Scholes Option Pricing Model |
87% |
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Binomial Option Pricing Model |
12% |
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Monte Carlo Simulation Model |
1% |
Changes in Option-Based Plans
Seventy-three percent of companies plan to make, or have made,
changes to their option-based compensation plans. All of the changes
involved a reduction of the use of options with 48 percent reducing the
number of employees receiving options and 44 percent reducing the total number of options granted (Table 3).
One-third
of the companies will be replacing some or all of the stock options with
shares of restricted stock or restricted stock units.
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Table 3: Changes to Stock Option Compensation Plans |
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Type of Change |
Percent of Companies |
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Reduce the number of employees receiving options |
48% |
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Reduce the total number of options granted |
44% |
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Replace some/all options with restricted stock |
33% |
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Replace some/all options with performance-based stock |
19% |
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Replace some/all options with long-term cash incentives |
13% |
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Replace some/all options with stock appreciation rights |
5% |
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Replace some/all options with stock shares |
1% |
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Other change not defined above |
8% |
Changes in Employee Stock Purchase Plans (ESPPs)
Fifty-nine percent of companies plan to make, or have made,
changes to their employee stock purchase plans. The most common change
is an elimination of the "look-back" feature, which allows an employee to
purchase stock at the lowest price within a specified time-frame (Table
4). Seventeen percent of companies with ESPPs plan to eliminate this
employee benefit.
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Table 4: Changes to Employee Stock Purchase Plans (ESPPs) |
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Type of Change |
Percent of Companies |
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Eliminate the "look-back" feature |
26% |
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Reduce the discount on stock purchase |
24% |
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Eliminate the plan entirely |
17% |
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Other |
7% |
Summary
Companies continue to adjust equity-based compensation
plans in response to expensing requirements now placed on these plans.
The trend is toward reduction of the reliance on stock options and an
exploration of other equity vehicles, mainly restricted stock,
restricted stock units, and performance-based stock. Changes are
not limited to stock option plans, with over half of companies also
planning to alter or eliminate their Employee Stock Purchase Plans.
Data source:
February
2006 Culpepper Pay Trends Survey of 90 companies.
Median size: 524 employees with a minimum of 4 and maximum of
42,000.
Breakdown by Sector:
36 percent software, 18 percent IT services,
13 percent
hardware/electronics/semiconductor, 12 percent life
sciences, 9 percent eBusiness,
9 percent telecom and 3 percent other.
Definitions of Equity-Based Compensation Plans
Qualified Stock Options (ISO's) -
Incentive stock option plans qualified to receive
special tax treatment under section 421(a) of the IRS tax code.
Non-Qualified Stock Options - Options granted that do not meet requirements for favorable tax treatment.
Restricted Stock - Recipient is granted shares, or a right to purchase shares, often at a discount, whose acquisition or sale is subject to restrictions. Restrictions may include employment tenure, personal performance requirements, or corporate performance requirements.
Performance-Based Stock - Stock grants in which the ultimate number of shares and/or the value of the stock is based upon other performance criteria (e.g., earnings per share growth over a three-year period).
Stock Shares - Stock grants in which there are not set performance criteria, restrictions, or limitations.
Stock Appreciation Rights
- Recipient is granted rights to receive the appreciated value of
stock at some future date.
Phantom Stock - Recipient receives "paper" units for which value
is typically based on book value of a share of stock at the time of
grant.
Employee Stock Ownership Plan (ESOP) - A qualified, defined
contribution to an employee benefit plan that invests primarily in the
stock of the employer company. A company creates a trust fund for
employees and funds it through contributions of stock, cash to buy
stock, or cash to pay back the ESOP's load to buy stock. The stock thus
acquired by the ESOP is then allocated to employee accounts.
Non-Qualified Employee
Stock Purchase Plan - A
non-qualified plan allowing employees to set aside money for a specified
period of time into a company account which is then used to purchase
company stock at a specific price. The price is typically set below
current market value or less than market value at the beginning of the
plan period.
Qualified Employee Stock Purchase
Plan - A plan qualified to
receive special tax treatment allowing employees to set aside money for
a specified period of time into a company account which is then used to
purchase company stock at a specific price. The price is typically set
below current market value or less than market value at the beginning of
the plan period.
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