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Some Employees May Run Out of Options

April 12, 2004
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Silicon Valley companies have been saying that non-executive employees will lose out as the U.S. government requires the expensing of stock options. A new Hewitt report supports that conclusion.

Thirty-six percent of organizations will, or are planning to, restrict eligibility for stock options at lower levels of their companies, according to Hewitt’s study of nearly 150 large U.S. companies. Hewitt consultant Tracy Davis says that while in some cases, companies will "keep the employees whole" and replace the options with cash or other forms of equity, “our data shows few companies will be fully replacing the value.”

When it comes to executives, 45 percent of companies expect to give option awards that are either the same size, or just a little smaller, than last year. Another 27 percent will give “significantly less” in option awards and 28 percent plan on increasing award sizes over last year.

Bruce Ellig, who wrote “The Complete Guide to Executive Compensation,” says that “broad-based stock option plans are much more likely to be curtailed under the new rule than the number of options the CEO will receive." Ellig predicts that most of the companies who will restrict stock options--the 36 percent in Hewitt’s study--will not offer an equivalent replacement incentive for employees. Offering stock grants, for example, is “too expensive,” he says.

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