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December 15, 2004
Value of Stock Options Dips

Chief executive officers and employees saw the value of their stock option awards decline by more than 40 percent between 2001 and 2003, according to an annual study by Watson Wyatt Worldwide.

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However, the decline was softened somewhat for CEOs, who benefited from an increase in the value of restricted stock and long-term incentive awards that most employees typically don't receive.

"As the era of accounting for options approaches, executive pay and stock-based incentive programs are still in a state of flux," says Ira Kay, national director of compensation consulting at Watson Wyatt. "The major challenge is for companies to develop new ways to motivate and reward executives and employees--especially for the majority of employees who aren't eligible for restricted stock and other long-term incentive plans."

Watson Wyatt surveyed approximately 1,000 of the largest companies in the United States. The study found that the average value of stock options for non-executive employees dropped 51 percent, from $4,196 per employee in 2001 to $2,037 per employee in 2003. Additionally, the average number of employee stock options that companies granted during that timeframe declined 30 percent, from 313 shares per employee in 2001 to 219 in 2003.

CEOs saw the value of new stock option awards decline 41 percent, from $3.4 million in 2001 to $2 million in 2003. However, the value of restricted stock awards increased nearly 70 percent, and payouts from long-term incentive plans increased more than 50 percent to help offset the decline. Despite these increases, the average total value of these three pay elements declined roughly one-third--from $4.6 million in 2001 to $3.0 million in 2003.

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