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Corporate Use of Equity Shrinks for Third Straight Year
Shares Allocated for New Grants to Employees Down 15%
NEW YORK, October 26, 2006 — Leading U.S. companies trimmed corporate overhang for a third straight year to a median of 12.9% of common shares outstanding, the lowest level of total stock use since 2001, according to the new 2006 Equity Stake Report from compensation consultants Pearl Meyer & Partners. The 17th annual study of public filings by the nation’s Top 200 industrial and service companies found a corresponding sharp decline in new equity awards to employees, to 1.06% of shares outstanding.
Over the past five years, the proportion of corporate shares utilized annually for new stock grants to employees has declined by more than half, the firm’s analysis of 2006 public filings found. Median annual grant rates peaked at 2.14% of outstanding shares during the market boom in 2001.
“Companies today know they must be both more frugal and more strategic about utilizing corporate equity in compensation programs,” said Jannice Koors, Managing Director of Pearl Meyer & Partners. “Along with longtime investor concerns about high dilution, there are new considerations regarding the cost of mandatory option expensing and the impact of more detailed proxy disclosure.”
Strikingly, 96 of the Top 200 companies – twice as many as two years ago – reported utilizing 1.0% or less of outstanding shares for stock-based incentives in the 2005 fiscal year. On the other end of the stock use spectrum, only six companies reported burn rates of 5.0% or more, compared with 20 such companies five years earlier.
In terms of total allocations, nearly half of the 200 companies studied had overhangs between 7.5% and 15.0% of outstanding shares, about the same proportion as the previous year. However, reported overhangs below 7.5% increased from 18 to 29 companies, while the number of overhangs between 15% and 30% fell from 78 to 66 companies.
Ongoing Shift in Equity Use
Along with generally reduced equity use, companies continue to increase their use of restricted stock and reduce dependence on stock options to promote equity ownership. Over the past six years, the proportion of shares allocated for restricted stock grants has increased tenfold as a percentage of all shares granted each year, while shares used for stock option awards have fallen by nearly half. Thirteen companies reported that they granted no employee stock options during 2005. Companies seeking to minimize overhangs often turn to full-value grants, because they typically deliver the same or greater equity value as options using fewer shares.
All but 88 of the Top 200 companies studied adopted option expensing during fiscal 2005, compared to 136 non-adopters the previous year. Beginning in 2006, all public companies will be subject to mandatory option expensing under new accounting rules.
Pearl Meyer & Partners' complete 2006 Equity Stake Report will be available later this fall.
About Pearl Meyer & Partners
Since 1989, Pearl Meyer & Partners has provided comprehensive solutions to Boards and their senior management in the areas of compensation governance, strategy and program design. Companies ranging from the Fortune 500 to not-for-profits and emerging high-growth organizations rely on PM&P for programs that align rewards with long-term business goals to create value for all stakeholders. Pearl Meyer & Partners is headquartered in New York and has offices in Atlanta, Boston, Charlotte, Chicago, Houston and Los Angeles. Pearl Meyer & Partners is the compensation consulting practice of Clark Consulting (NYSE: CLK).
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