Watson
Wyatt recently completed its second annual analysis of stock option
valuation assumptions and results under Statement of Financial
Accounting Standards (SFAS) 123(R).1 From 2006 to 2007, the
percentage of companies disclosing option fair values decreased from 74
percent to 73 percent, and the number disclosing stock compensation
expense increased from 93 percent to 94 percent. Median stock
compensation expense increased by 9 percent in 2007.
The analysis looks at stock volatility, expected option life,
assumed dividend yield, risk-free rate valuation assumptions and other
data, as well as the strike price and fair market value (FMV) per
option for new grants first reported in the 2007 10-K filings of 909
companies in the Fortune 1000 as of November 2008.2
This is the first year Watson Wyatt compiled the total FMV of new grants. Figure 1
shows the median percentage increases in total stock compensation
(options and restricted shares combined) and total FMV of new option
grants by economic sector. The median total FMV of options granted in
2007 declined by 1 percent. This is a much smaller decrease than we saw
in 2006 and 2005, when the median declines were 10 percent and 6
percent, respectively.
Figure 1
Percentage increase in stock compensation and FMV of new option grants
Source: Watson Wyatt Worldwide.
We also compiled total stock compensation expense (options and
restricted shares combined) for the first time. Median stock
compensation expense increased by 9 percent in 2007. The median
percentage increases in 2006 and 2005 were significantly greater due to
the transition to FAS 123(R) accounting: 92 percent in 2006 and 35
percent in 2005.
The median total FMV of new option grants declined from 2.4 percent
of selling, general and administrative (SG&A) in 2006 to 1.8
percent in 2007. Figure 2 presents both the median FMV of new
option grants and total stock compensation expense expressed as a
percentage of SG&A for 2007 and 2006. Median stock compensation
expense declined from 2.8 percent of SG&A in 2006 to 2.3 percent in
2007.
Figure 2
Median FMV of new option grants and stock compensation expense as a percentage of SG&A for 2007 and 2006
Source: Watson Wyatt Worldwide.
The 2007 median assumptions for all collected data items are shown by economic sector in Figure 3.
Figure 3
Median assumptions for 2007 disclosures by economic sector
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