Here's Your Stock. Here's the Catch...

Linder says, the historic attraction of options, as opposed to restricted stock grants, was that “options carried no accounting expense—no hit to your bottom line.” The change in accounting rules, she says, coincides with a public outcry about executive compensation and pressure from “post-Enron shareholders who are savvier and more interested in what executives are doing for their money. Shareholders [are demanding] performance, not just time in the seat.”

Thus the move toward more restricted stock awards and fewer options. No one we spoke with could quantify the surge, but all agree it is happening.

Management Only?

Sources also agree that stock options are less likely today to be offered to large numbers of employees, as opposed to managers and executives only. The practice of using options to give everyone an ownership stake reached its zenith among technology companies during the 1980s and ’90s, when, Linder says, “startups were trying to get good people and couldn’t pay a lot of cash.”

Many startups are still in that position, of course. But for companies in general, it isn’t just Financial Accounting Standard 123R or stockholder concern about share dilution that has taken the bloom off the rose. Experts say that experience has caused many firms to question the value of options as an incentive for rank-and-file employees.

Turner points out that the purpose of granting options is to encourage behavior that will lead to stock price appreciation. “But for lower-level employees, a lot of that is outside their control,” he says. “The deeper in an organization you go, the less line of sight you have between employee decisions and [the company’s share price].”

Because lower-level employees don’t see a clear link between their actions and overall corporate performance, they tend to value higher salaries or bonuses more than options. Turner says studies have shown that nonmanagers value stock options at only about one-third of their actual economic costs.

According to Nussbaum, companies have found that employees below a certain income—“Pick a number: $50,000? $70,000?”—often view options as additional cash income anyway. “As soon as the options vest, they tend to cash out,” he says.

Hence the thinking in more corporate boardrooms today: If employees prefer cash, and the board now has to charge options against the company’s bottom line anyway, why not just give them cash?