Tech firms cut back on options, survey says- Companies Tighten Eligibility, Plans

Pressured by investors, rule-makers and regulators, most tech companies have gotten stingier with stock options and are investigating other forms of equity compensation, a new survey shows.

By Mark Schwanhausser
Mercury News

That’s not to say options will cease to be Silicon Valley’s unofficial currency, experts say. But a Deloitte & Touche survey to be released Tuesday underscores that shareholder activism, the push to rein in executive pay and looming accounting rule changes make this a pivotal time in the history of stock options.

Not only are most tech companies granting fewer options, but many are retreating from broad-based plans that have become a national standard for sharing options at all levels of the workforce. And whether they want to cut back, nearly three out of four public companies warn that they will run out of options within two years unless shareholders allow them to replenish their option pools.

That might be a fight. Thanks to new stock-exchange rules, shareholders must approve all option plans, and they’ve been complaining loudly that options dilute their stakes.

“If shareholders don’t want you spending these shares as quickly as you have been, you have to do something,” said Michael Kesner, a partner with Deloitte’s Human Capital practice. “It’s logical that companies are cutting back.”

The question is: Will the pain be felt by all?

That depends.

The survey indicates that 73 percent of the public companies either have reduced or plan to reduce the number of options they hand out in the next 12 months. Of those, 60 percent say the cuts will be felt by all, regardless of one’s rank. But more than one-third of the companies said the cuts would primarily affect lower-level workers.

More than half of the companies said they are tightening who’s eligible for options, too.

“I wouldn’t say the stock-option era is over,” said Michael Benkowitz, a compensation consultant with Mellon’s Human Resources & Investor Solutions. “But the broad-based plan where everybody receives a grant? I think we’re done with that. Companies are being much more targeted and selective about who is receiving equity.”

`Economic atrocity’

But Joseph Blasi, a Rutgers University professor, warns that cutting back options for rank-and-file workers while insulating top managers and executives “amounts to an economic atrocity against normal working people.” He hopes more companies like Intel and Cisco Systems will try to win over shareholder support for broad-based plans rather than back down without a fight.

“Unfortunately, we’re seeing a race to the bottom here,” said Blasi, who co-wrote “In the Company of Owners,” a book on the spread of broad-based option plans. “It’s easy to simply do the fast thing that makes shareholders happy. . . . But it’s wrong. It’s intellectually dishonest, and it’s stupid policy.”

Regardless of the implications, there may be no stopping the wave of change. Silicon Valley leaders from Adobe Systems to Yahoo have tightened the spigot on options. Last week, Oracle told shareholders at its annual meeting that it not only is handing out fewer options but it also is weighing “equity vehicles” that it could substitute for some or all of its option compensation.

Changes afoot

Deloitte’s survey provides broad evidence of emerging trends. Among the highlights of the survey of 196 public and private companies, including 175 in the tech industry:

• Sixty percent ranked looming accounting rules as the No. 1 issue affecting compensation plans — and 20 percent ranked it second. In September, the Financial Accounting Standards Board said it needed more time to work out rules that will require companies to report stock options as an expense that counts against profits. It plans to issue a proposed rule in the first quarter of 2004 and a final rule by the third quarter.

• New employees might feel the pinch on options more than most. Among the companies that said they plan to tighten the flow of options, 26 percent of public companies and 38 percent of private firms said new hires will get fewer options.

• Among the tech companies, nearly three-fourths said they were considering — or willing to consider — alternatives to stock options. The most popular choices were restricted stock or stock units that vest over time or are tied to performance benchmarks.

• Nearly two-thirds would overhaul their employee stock purchase plans, or ESPPs, if FASB requires that they be expensed like stock options. Nearly half would reduce the discount that workers pocket, and nearly one-fourth threatened to can the popular plans altogether.
Contact Mark Schwanhausser at (408) 920-5543 or mschwanhausser@ mercurynews.com.

http://www.bayarea.com/mld/mercurynews/7051125.htm