The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Recently, I blogged about a WSJ article entitled the “Last Gasp for Stock Options?” The reporter had left me a voicemail asking how many optionees there are today – but I wasn’t able to return the call due to vacation demands. Here is my take on that question if I had been able to return the call:

We don’t know and no one really knows. It’s virtually impossible to figure out, because there aren’t any required disclosures that cover how many employees at a company hold options. And then there are all the private companies that grant options, which are even harder to quantify because they don’t make any public disclosures at all.

As of 2009, the NCEO estimates that 10 million individuals participate in broad-based equity plans. Here is an article on their website. This is the closest I’ve ever seen to an estimate – but I am not sure how they arrived at that estimate so perhaps we should be a little skeptical of it. Also, a few other things to note about it:

1. It still doesn’t answer the question because it presumably doesn’t include executives and other high-level employees that participate in equity plans that aren’t broad-based.

2. Presumably broad-based equity plans includes RS/RSU award programs as well as options, so it also isn’t an estimate of how many people hold options.

3. The data is from 2009. Since then, we’ve seen a pretty distinct decline in the use of stock option plans. 92% of respondents to the NASPP’s 2010 survey (co-sponsored by Deloitte) reported that they had an option plan in 2010; this year’s survey will show only 68% reporting having an option plan (I’ve seen the preliminary numbers). On the other hand, 91% of respondents have RS/RSU award plans, which is up slightly from 89% in 2010.

Which means that RS/RSUs now outpace stock options in prevalence, so however many employees that held options back in 2009 when the NCEO came up with these estimates, I’m pretty sure it’s fewer now (although not as sharp a drop as in the prevalence of option plans because options are outstanding for ten years, so some of the employees that held options in 2009 still hold them now, some of them just aren’t getting any more and fewer newly hired employees are receiving options).

If all stock option grants that have been eliminated since 2009 have been replaced with RS/RSUs, then the NCEO’s estimate of 10 million participants in broad-based plans will have held steady. But I’m not sure that’s the case. I suspect that as companies switch over to RS/RSUs, they also tighten up their eligibility restrictions.

4. This year’s NASPP/Deloitte survey will show a distinct increase in the use of performance awards and an increase in the use of TSR as a performance target. So I think that some of the stock options for executives have been replaced with performance awards, including relative TSR awards.

Towards the end of the WSJ article, Emily Chassen quotes the CFO of Pandora, who apparently asked to be paid entirely in stock options because that would push him to stay ahead of the competition. But, of course, one of the chief criticisms of stock options is that they really don’t do that. If the market’s up, it’s often up for everyone.

One reason companies are switching from options to relative TSR awards for execs (and shareholders are pressuring them to do so) is because relative TSR awards pay out only if you beat your peers (well, there’s a spectrum of payouts and they usually payout something if you are at least in the 25th percentile, but you don’t get the maximum payout unless you are above the median, usually in the 75th percentile). Stock options pay out when your stock price is up – regardless of why it’s up and even if your peer’s stock prices are up more than yours.

Frankly, the CEO of Apple asking for his existing awards to be modified so that a portion vest only if Apple’s TSR exceeds that of his peers is more impressive than the CFO of Pandora’s request to be paid only in stock. (Although perhaps Tim Cook was just trying to get out ahead of possible shareholder pressure to convert all of those RSUs to vest based on performance at Apple’s next say-on-pay vote. There have been several notable examples of ISS forcing companies to retroactively modify awards to execs to vest entirely on performance. If Cook’s move works and shareholders are placated, at least some of his RSUs still vest based only on the passage of time.)

Come to the NASPP Conference in DC – just two weeks away! – during which the 2013 survey results will be unveiled during the keynote “State of the Union: Leveraging Stock Based-Pay in Comp & Benefits” and in more detail in the session “The Hard Data: Top Trends in Equity Plan Design.”