On August 27, 2013, there was an article in the Wall Street Journal titled “Last Gasp for Stock Options?” The writer, Emily Chasan, starts the article with this sentence: “Stock options are on the verge of extinction.” Since Emily just came out and said it, I won’t bury the lead either.
Stock options will not die any time soon.
The use of stock options has trended downward for many years. At their peak, stock options were the magical currency that made the dotcom boom so lucrative. They also helped support the semiconductor and telecom booms in other periods. The key here is the boom. As long as we continue to have outsized growth in specific industries, stock options will continue to survive at public companies.
The article mentions a study by the firm, James F. Reda & Associates, analyzing the largest 200 companies in the US. The data shows that stock options accounted for 31% of executive compensation packages for these companies in 2012. While this number has been shrinking, two facts not to be ignored. 1) There are far more than 200 companies, 2) 31% is nowhere near the definition of extinction.
What we are seeing is a rebalancing of equity compensation as companies evolve their compensation philosophy. It is long overdue at many companies. We are seeing more use of performance-based equity awards. Performance-based compensation is the mantra of Say on Pay defenders. Many companies have climbed on this bandwagon and the rest of publicly traded companies will likely follow.
But, performance awards are no more a panacea than stock options. So, we continue to see strong use of time-vested restricted stock units. These provide the stability that was often missing for stock option-heavy pay packages. Again, these do not work in every situation, so judicious use is advised.
During all of this the use of stock options at high-growth start-ups has not waned much. They are an effective form of currency when cash is sparse and hope is on the horizon. Don’t expect that this will change dramatically anytime soon.
Unlike the Dodo bird, we will not see the demise of stock options anytime soon. Perhaps they are more like the Cicada. They may go into hibernation at times, but when the environment is right they will be back in clouds, making noise and attracting attention. If you have not evaluated your stock option usage now is the time. Just remember that is it about balancing things, not killing them.