Stock options: Last year’s darling, this year’s headache

The economic downturn has companies in limbo over how to handle pay for performance. One recent survey shows stock options in particular are under review.

One of the biggest concerns surrounding stock options is the practice of option re-pricing because of stocks that have gone underwater, the Hay Group’s Compensation Trends 2002 Briefing shows. Forty-one of the 61 companies surveyed have some underwater option holders. While 84 per cent of these businesses have not taken any action at all to deal with these underwater options, four per cent have decided to re-price.

“Re-pricing is not common at all because shareholders have a violent aversion to it, but I’m seeing more of it now than in the past,” said Mike Thompson, national director of reward management for Hay Group Limited. “We know it’s something they take seriously because they see no other recourse.”
Economic uncertainty has companies worried about using stock option plans in the future.

“This year it’s clear that people will be conservative,” said Thompson.

“Be more selective when you create the structure of your option plan. Don’t use it for every employee, that gets the organization in trouble.”

Liz Wright, senior compensation consultant for Watson Wyatt, said even with the economy’s turbulent times, stock options as rewards can still be used in an incentive package.

“Companies have to focus on the long-term when they’re using vehicles like stock options...that is a long-term solution as well as a reinforcement,” said Wright. “It’s how you position it and how do you want employees engaged as part of the business. Are you into short-term results or long-term sustainable growth? What are you saying to your employees?”

With the uncertainty of stock options, companies are leaning more towards pay for performance and are able to increasingly offer it to all levels of employees, Watson Wyatt’s Annual Canadian Salary Survey indicates.

According to the study, variable pay programs are shifting towards a combination of financial and subjective objectives to measure and reward employee contribution. About 83 per cent of the organizations surveyed in the study used this kind of incentive package, that’s up eight per cent from last year.

“Variable pay schemes allow organizations to accommodate their employees’ needs and to attract, retain and motivate their workforces, while also responding to economic fluctuations,” said Wright.

The Watson Wyatt survey showed there is a clearer line of sight between individual employee contribution and organizational success.

“We’re seeing a trend towards higher leveraging, in other words higher opportunities to earn more and that also tells me that companies are becoming much more savvy in their performance measure...allowing that leverage to happen, understanding the value and being prepared to share the success,” said Wright.

This year, the average base salary increase for all employees rose by 4.1 per cent overall, the survey reported. While some businesses were reluctant to forecast salaries for 2002 because they are unsure about the economy, those that responded predict an average increase of 3.7 per cent.

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