Study Shows Options May Still Be Best Driver of Performance

With the change in accounting rules for stock options, many firms are taking a knee-jerk approach and are simply getting rid of options in favor of restricted stock, says Jack Dolmat-Connell, president and CEO of DolmatConnell & Partners, an executive compensation consulting firm in Newton, Massachusetts. But in doing so, they might be undercutting their ability to get the most out of key executives.

“There are a lot of tax and accounting ramifications to offering stock options, but if companies only look at it from that perspective, they may miss out on the bigger picture,” he says.

A recent survey conducted by Dolmat-Connell shows that of the 100 largest technology companies, high-performing firms were 65 percent more likely than low-performing companies to grant stock options to their CEOs and 39 percent less likely to grant restricted stock.

Conversely, low-performing companies were 32 percent less likely than their high-performing peers to solely grant stock options, and 63 percent more likely to grant stock.

The issue with restricted stock is that even if the company’s performance dips, the employee still can benefit. That is not the case with options, Dolmat-Connell says. “If you grant an option at $30 and the stock goes to $25, the option is worthless,” he says. “But if that amount is in restricted shares, the executive still gets a payout.”

The technology industry in particular realizes the value of stock options, but more companies in that sector are combining them with restricted stock, Dolmat-Connell says. According to the study, 41 percent of the companies surveyed offer only stock options to executives, 17 percent offer a combination of restricted stock and stock options and just 5 percent offer restricted stock only.

Technology companies remember how important stock options are to the culture of their companies, Dolmat-Connell says. “Bill Gates could not have recruited the level of talent that he did had he not had stock options to give to employees.”

—Jessica Marquez