The NASPP Blog

Many of us can identify with the era we grew up in by listening to music. There are songs that can still transport me back to my high school days. Just like I associate music with an era of my life, so do I associate stock options with a period of time as well. I “grew up” in equity compensation during the 1990s when the dominant form of stock compensation was stock options. I took my CEP exams when many of the questions centered on the treatment of stock options. I feel like the early memories of my career are heavily intertwined with stock options. Yes, I know their use is presently on the decline. Yes, I know full value awards and pay-for-performance have taken over. But knowing all of that still didn’t fully prepare me for an article in the Wall Street Journal last week titled “Last Gasp for Stock Options?” I felt my heart rate rise. Could the end of the road for stock options really be near?

The End or Just a Trend?

The WSJ article highlights a trend we’ve long been observing: that the use of restricted stock and performance based awards have overtaken the use of stock options. It’s not really a surprise, given Dodd-Frank and the migration to a pay-for-performance culture. Still, it’s hard to imagine that stock options could really be at risk of being wiped out, as explored in the article. After all, stock options still seem to have some traction, particularly in the lower ranks of the organizations where pay-for-performance philosophies aren’t rampant. Stock options are also still fairly popular in private companies where cash may be short, and desire for flexibility high. With stock options, employees can time the triggers for taxation (subject to vesting, of course) to a time that is desirable for them. So while I wholeheartedly agree that the overall use of stock options has decreased, I still think there is a still a long term place for stock options in our equity compensation mix. It seems that many companies still tend to agree – even if they aren’t granting many stock options right now. In the NASPP/Deloitte 2010 Domestic Stock Plan Design Survey, 97% of companies with an omnibus plan reported that stock options were available for issuance under the plan. Of course, one could argue that the allowance for stock options under a plan is much different than actually issuing stock options out of the plan. That is true, but the fact that companies have continued to permit stock options as an equity vehicle suggests to me that they haven’t written them off completely. The WSJ article also highlighted that some executives are still insisting to be compensated with stock options, like Pandora Media Inc’s new CFO Mike Herring – who asked for all of his incentive compensation to be in the form of stock options.

It’s Not Over…

Although it appears likely that the use of stock options may continue its downward trend in the immediate future, I don’t think extinction is near. There are still those who believe in the power of stock options as a compensation and motivation tool. The downward spiral could be reversed – perhaps more executives will follow in Mr. Herring’s footsteps and demand stock options as part of their compensation. We’ll be continuing to monitor this trend. We have some articles in our Surveys and Studies portal that dig further into the analysis as well. For now, I’d love to hear your thoughts on whether you think stock options are done, or have more life ahead. Take a moment to take our poll (a one question survey). I promise to share the results in a future blog.

-Jennifer