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October 19, 2005
Stock-Option Grants Not What They Used to Be

Employers are granting stock options to fewer employees and the sizes of those grants are smaller, according to a new study by human capital consulting firm Watson Wyatt Worldwide.

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The study found that the economic value of stock option grants at the nation's largest corporations shrank by almost 60 percent between 2001 and 2004, dropping from a total of $118 billion to $51 billion.

The study also found that the economic value of stock options granted at the typical company declined 64 percent from $103 million in 2001 per company to $37 million in 2004. Last year alone, the value of stock options fell 17 percent.

The decline occurred in all major industry sectors, even though the stock market increased steadily. Between 2001 and 2004, the stock price at the typical S&P 1500 company rose 34 percent--and 18 percent in 2004 alone.

This decline in stock options value reflects a drop in the number of employees receiving stock options as well as shrinking grant sizes at all employee levels. The study is based on public data from companies in the S&P 1500.

"The results show that the attractiveness of using stock options to reward executives and broader employee groups is diminishing," says Ira Kay, global director of executive compensation consulting at Watson Wyatt. "In fact, companies are now replacing stock options with restricted stock and other long-term incentive awards to create a better portfolio of incentives and to comply with the new accounting rule requiring companies to expense options."

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