Never before has the issue of executive compensation garnered so much of the public’s interest as it has in recent years, due in large part to several highly publicized corporate scandals.
The backlash from incidents involving top executives at global organizations, and recent changes in SEC proxy and accounting rules have prompted interesting new trends related to how executives and board members within large, public technology companies are being compensated and to what degree.
Organizations across the globe are re-evaluating their methods of compensation for both executives and board members. From base salaries and stock options to cash bonuses and perks, compensation trends have undergone a noticeable shift in the past several years.Large technology companies in particular are being a lot more careful when it comes to providing stock awards. Pressure from the shareholder groups on dilution issues, as well as the recognition of compensation for stock awards based on changes in accounting and compensation rules are resulting in companies being more restrictive in their use of stock compensation.
While the use of stock compensation at the executive level, particularly for CEOs and other senior executives, is still fairly common, many large technology companies are not making this type of compensation available as far deep into their employee population as they would have previously. According to a recent research report on executive compensation for large, public technology companies, those organizations that are still awarding stock compensation for employees at the CFO level and below are not being as generous with their awards as they would have been before shareholder groups began placing greater focus on dilution and stock awards were considered compensatory and resulted in a charge. From 2004 to 2006, the average stock awards to CFOs and other executives not including the CEO only increased by 1% and 5% respectively.
An emerging trend within executive compensation also reveals that large technology companies are making greater use of restricted stock as a compensation tool. Under the old compensation rules, restricted stock was compensatory and therefore subject to compensation charges. However, simple option awards were not considered compensatory and did not result in any charge. As a result, in the past companies often shied away from issuing restricted stock in favor of option awards. The times have changed and so have compensation rules. Under the new rules, option awards no longer hold such an advantage over restricted stock, as both option awards and restricted stock are now considered compensatory and result in compensation charges.
The enhanced appeal of restricted stock awards based on this rule change is causing organizations to increase their use of restricted stock.As of 2006, approximately 82% of large technology companies surveyed provided restricted stock awards to their executives, up from 35% two years prior. Restricted stock involves less risk for executives as compared to stock option awards and accordingly, fewer rewards are granted and that helps the dilution dilemma as well. Option awards, comparatively speaking, carry much greater risks and as a result the size of the awards is typically larger.
To balance out the risks versus the rewards, many companies are using a combination of restricted stock and options. Why this change in philosophy? Their goal is to a avoid situations where large, rapidly growing technology companies provide executives with stock options only, then over the course of three to four years, the company’s growth rate slows down, as does the stock price, resulting in little if any profits for the employees.By providing executives with restricted stock as well, the employee is assured some degree of compensation.
