Stock options, once the king of long-term incentives, are gradually losing their status as the predominant form of equity-based compensation. Results from a 2008 Culpepper Pay Practices & Policies Survey reveal that long-term incentive (LTI) plans for U.S. employees in technology and life science companies continue to shift away from plans using only stock options towards plans using a mix of multiple types of long-term incentives.

Most technology and life science companies report that they continue to offer long-term incentives to employees. However, the types of LTI plans used, number of eligible employees, and size of equity awards have changed dramatically in recent years.

Historically, stock options were the LTI vehicle of choice, used by nearly all companies offering long-term incentives. However, the use of stock options has declined significantly over the past three years, with only 59% of companies now offering options to employees (Table 1). Accounting rules requiring companies to expense options, backdating scandals, and declines in the stock market have had a dramatic impact on the use of options and other types of LTI awards.

As the use of stock options continues to fall, the prevalence of other types of LTI plans is rising. Restricted stock (51%), performance-based LTIs (38%), SARs (11%), and phantom stock (8%) are all gaining ground on stock options.

Diversification of LTI Plans
Instead of using a "one-size-fits-all" approach, over half of companies (53%) diversify their long-term incentives with a mix of different type of plans (Figure 1).

Only 17% of companies use stock options as their sole long-term incentive, while 42% offer stock options with a mix of other types of LTI plans.

Restricted stock and performance-based plans have both gained popularity in recent years; however, only 19% of companies offer either of these types of plans as their only LTI option.

Criteria to Determine LTI Eligibility
The most common criteria used to determine whether an employee is eligible for long-term incentives is job level (Figure 2). Individual employee performance, salary grade/level and job title are also frequently used as factors to determine eligibility for LTI awards.

LTI Trigger Events and Award Frequency
The most common event triggering LTI awards is at the time of hire. Seventy-two percent of companies offer long-term incentives to newly-hired employees (Figure 3). Although hiring someone may trigger an LTI award, eligibility requirements or waiting periods may apply.

The second most common situation to trigger an LTI award is an annual grant process. Sixty-two percent of companies grant new LTI awards as part of an annual grant process.

While nearly three-quarters of companies offer long-term incentives at the time of hire (Figure 3), only 2% restrict LTI awards to only at time of hire (Figure 4). Most companies continue to grant new LTI awards to eligible employees on an annual basis.

Alternatives to LTI Plans
Organizations without long-term incentive plans were asked to report what other rewards and incentives they use to attract, retain, and motivate employees. The most common strategies for companies without LTI plans are to offer above-market benefits plans, non-cash awards & perks, and short-term cash bonuses & incentives (Figure 5).

Data Source: Culpepper Pay Practices & Policies Survey of 145 organizations.
Survey Dates: June - July 2008

Breakdown by Industry Sector:
Technology 75%, Life Science 12%, Other Sector 13%

Breakdown by Number of Employees:
Up to 100: 21%, 101 to 1000: 35%, 1,001 to 5,000: 26%, Over 5,000: 18%

Breakdown by Corporate Status:
Private 51%, Public 46%, Non-Profit 2%, Other 1%

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