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Value of New Stock Option Grants for CEOs Declines Sharply
WASHINGTON -- The value of new stock option awards granted the chief executive officers of large companies declined nearly 60% between 2001 and 2003. The decline, however, was softened by a sharp increase in restricted stock and long-term incentive award values as well as a dramatic increase in the "in-the-money" value of unexercised stock options from historical grants, a new proxy analysis by Watson Wyatt & Co. finds. Watson Wyatt is human capital consulting firm that released its analysis Thursday.The analysis found that the average value of new stock option grants declined from $10.2 million in 2001 to $4.2 million in 2003. At the same time, the value of restricted stock awards increased 58% while the average value of other long-term incentive awards jumped 80%. But these increases were not nearly enough to offset the decline in new grant values.CEOs saw the average total value of these three pay elements decline by about $5 million. The study also found the number of stock options declined 37% during the period.The decline in both the value and number of stock options between 2001 and 2003 comes as the proposed Financial Accounting Standards 123 rule on expensing options looms and institutional investors push for reducing the use of stock options and instead creating new compensation arrangements that reward performance. The analysis examined CEOs who remained in their jobs between 2001 and 2003 at 373 of the largest publicly traded U.S. companies."Companies are getting serious about revamping their executive compensation programs, and the shift away from stock options is beginning to accelerate," said Ira Kay, national director of compensation consulting at Watson Wyatt. "However, many CEOs have yet to feel the full impact of this swing because the value of their unexercised stock options from earlier grants has skyrocketed."The analysis found that the "in-the-money" value of unexercised stock options from previous grants increased significantly -- 79% -- from a median of $6.7 million in 2001 to $12.0 million last year. The increase in the value of in-the-money unexercised stock options resulted primarily from the rebound in the stock market over the three years."Given the up-and-down supply of CEO talent available in the marketplace, and that a vast majority of these in-the money stock options are vested, companies will be forced to look at other ways to retain their CEOs and other senior executives," Kay said. "Furthermore, the decline in the value of new stock option grants has yet to be -- and may never be -- mitigated by other forms of compensation."While stock options have played a significant role in helping to create economic value for companies over the years, the golden age of stock options may be over," Kay continued. "Moving forward, companies will need to re examine their executive pay programs and consider adding a mix of incentives and other reward strategies that will replace stock options as well as excite, motivate and retain key executives."Watson Wyatt & Co., the primary subsidiary of Watson Wyatt & Co. Holdings is an international human capital consulting firm that provides services in the areas of employee benefits, human capital strategies and related technology solutions. The firm is headquartered in Washington, D.C., and has 3,900 associates in 61 offices in the Americas and Asia-Pacific. "