Restricted Stock In, Stock Options on the Way Out for Tech and Life Sciences - WorldatWork (sourced by Culpepper) - July 30, 2008

Restricted Stock In, Stock Options on the Way Out for Tech and Life Sciences

July 30, 2008 — Stock options, once the king of long-term incentives
(LTIs), are gradually losing their status as the predominant form of
equity-based compensation. A recent survey shows only 59% still
offering options and only 17% use options as the sole long-term
incentive (LTI).

Results from a recent Culpepper Pay Practices & Policies Survey
reveal that LTI plans for U.S. employees in technology and life science
companies continue to shift away from plans using only stock options
towards plans using a mix of multiple types of long-term incentives.

Most technology and life science companies report that they continue
to offer LTIs to employees; however, the types of LTI plans used,
number of eligible employees and size of equity awards have changed
dramatically in recent years.

Accounting rules requiring companies to expense options, backdating
scandals and declines in the stock market have had a dramatic impact on
the use of options and other types of LTI awards.

As the use of stock options continues to fall, the prevalence of
other types of LTI plans is rising. Restricted stock (51%),
performance-based LTIs (38%), SARs (11%) and phantom stock (8%) are all
gaining ground on stock options.

Diversification and Other Trends

Following are additional findings from the survey results:

• More than half of companies (53%) diversify their long-term incentives with a mix of different types of plans.


• 42% offer stock options with a mix of other types of LTI plans.


• Restricted
  stock and performance-based plans have both gained popularity in recent
  years; however, only 19% of companies offer either of these types of
  plans as their only LTI option.


• The most common criterion used to determine whether an employee is eligible for long-term incentives is job level.


• Individual
  employee performance, salary grade/level and job title are also
  frequently used as factors to determine eligibility for LTI awards.


• The
  most common event triggering LTI awards is at the time of hire. 72% of
  companies offer long-term incentives to newly-hired employees. Although
  hiring someone may trigger an LTI award, eligibility requirements or
  waiting periods may apply.


• The second most common
  situation to trigger an LTI award is an annual grant process. 62% of
  companies grant new LTI awards as part of an annual grant process.


• While
  nearly three-quarters of companies offer long-term incentives at the
  time of hire, only 2% restrict LTI awards to only at time of hire. Most
  companies continue to grant new LTI awards to eligible employees on an
  annual basis.

• The most common strategies for companies without
  LTI plans are to offer above-market benefits plans, non-cash awards and
  perks, and short-term cash bonuses and incentives.