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CEO Wire, 11/5/02
OPTIONS FRENZY CREATES LARGEST OVERHANG YET
By Paul Rogers
The popularity of stock options as a form of executive pay has created the highest levels of stock "overhang" ever in corporate America, a new study has found, raising concerns about the dilution of shares.
Overhang refers to the number of stock options granted, plus those available for future grants, as a percentage of a company's common shares outstanding.
The median overhang in 2001 hit 15 percent, up from 13.3 percent a year earlier and 10.7 percent in 1997, based on the proxies and annual reports of 350 large U.S. corporations studied by Mercer Human Resource Consulting. In the early '80s—before cash-poor tech companies popularized the practice of granting employee stock options—the figure stood at 4 percent.
Overhang varies widely by industry. The industries with the highest median overhang are diversified financial services (36.8 percent) and computer/office equipment (23.7), according to the study. Those with the lowest are insurance (9.9 percent) and paper products (10.8).
While a certain amount of overhang is often seen as a positive, indicating executives have a stake in their company, the current trend "presents serious dilution concerns," says Peter Chingos, head of Mercer's executive compensation consulting practice in the United States. As a company grants more shares, it dilutes common shareholders' interests, potentially creating downward pressure on stock prices. And in many firms, particularly those affected by the dot-com bubble, employees hold so-called underwater options that are below market value. These provide little employee motivation, but they add to a firm's overhang.
As Chingos points out, companies are likely to curtail their overhang in light of proposed amendments to financial accounting standards, namely that stock options be counted as an expense. In place of options, he says, cash-based incentive programs are expected to become more common. |
