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Wall Street Turmoil Tainting Stock Option Plans

September 17, 2008
Stock options long have been a core part of the compensation packages of many mid- to high-level employees in financial services.

But the recent turmoil on Wall Street may make options a hard sell to potential recruits—at least for the next several months, compensation experts say.

During the past few years, employers’ use of stock options has declined as a direct result of accounting-rule changes that force companies to list the value of option grants as expenses on their balance sheets.

And with the turn of events affecting Fannie Mae, Freddie Mac, AIG and Lehman Brothers, thousands of employees in the financial services sector have seen their options plummet in value.

According to published reports, Lehman employees received much of their pay in stock options and shares. In some cases, stock could have made up 10 to 60 percent of employee compensation, according to reports. Since its all-time high of $86.18 a share in 2007, stock in Lehman, which declared Chapter 11 bankruptcy September 15, dropped to 13 cents as of market close Wednesday, September 17.

“At least for the near term this is going to put the nail in the coffin for using stock options,” said Alan Johnson, a New York-based compensation consultant. “I think people are going to be more reluctant to use them.”

While stock options might make people uneasy now, it’s only temporary, said Rick Smith, a senior vice president at New York-based Sibson Consulting.

“The big securities firms may turn to restricted stock and cash to recruit the best and the brightest,” he said. “But options will always be around because they are the best way to tie employee pay with performance.”

What’s occurring in financial services is reminiscent of what happened in 2001 with the dot-com bubble, said Bill Coleman, senior vice president of Salary.com.

At that time, employers had to work a bit harder to convince employees and prospects that options were valuable.

“You may see financial services companies do a bit more communicating along those lines now,” he Coleman. “But ultimately the big thing for these guys is the bonuses, not the options.”

Actually getting stock options right now wouldn’t be such a bad thing for most employees in financial services given how depressed the sector is, said Rose Orens, worldwide partner and senior consultant at Mercer.

“This could be perceived as an opportunity by many people,” she said.

Ultimately Wall Street is all about taking risk to reap the rewards, and despite the current crisis, that won’t change, Smith said.

“At-risk compensation will continue to be a significant part of a person’s overall package in financial services,” he said. “High-risk, high-reward opportunities is what Wall Street is about.”

—Jessica Marquez

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