Companies Plan For Possible Shift in Stock Option Accounting

A survey of large U.S. employers conducted by Mercer Human Resource Consulting shows most companies expect a change in stock option accounting over the next five years. Not all have fully analyzed how this change will affect their compensation policies. But those that have stepped up to the issue generally anticipate making some changes that will affect their employees' compensation.

Highlights:

  • The vast majority (87%) believe option expensing will be mandated in the U.S. within the next five years.

  • Few (12%) think it is the right thing to do. A significant minority (28%) consider an accounting charge inappropriate. Some say options should be expensed, but only in a consistent manner by all companies (25%) or only if a reliable method can be found (12%).

  • At the current time, most companies (56%) are reviewing the implications, but taking a "wait-and-see" approach. Some say they will begin expensing options as soon as practical (9%) or when a structured approach or common methodology is approved (18%).

  • If required to expense stock options, 35% predict the size of the impact will be less than 5% of their earnings per share, while 28% say it will be between 5 and 10%.

  • Expected changes in compensation policies include reducing the number of options granted to employees (33%), reducing the number of individuals who receive stock options (31%), and offsetting stock options with some other form of equity (23%) or nonequity (22%) compensation program.

Martin Katz, senior executive compensation consultant for Mercer and author of the study, suggests that companies should take the time to assess the potential impact of a change in accounting rules on their overall equity strategy, eligibility and plan design now, while they have the time and opportunity to plan. "Companies need to be prepared in the event of a change," he says, "which most believe is just around the corner."

-Rosemary Schlank

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