Embargoed for Release Until: October 13, 2004

Contact: Sean Crowley 202-478-6128, scrowley@mrss.com

Top Corporations Restructuring Long-Term Executive Pay in Face of Pending FASB Proposal to Force Firms to Expense Stock Options

New Survey Finds Major Shift in Long-Term Incentive Programs
for Executives at Top 250 Firms

New York - Without waiting for the Financial Accounting Standards Board (FASB) to finalize its proposal to force companies to count options as an expense against profits, many of the nation’s Top 250 companies are already changing the design of their long-term pay packages for executives, according to a new survey by Frederic W. Cook & Co.  

“Even though the FASB stock expense regulation is not final and Congress still is considering legislation to weaken it, many companies already are expensing stock options,” said Justin Fossbender, the author of the Frederic W. Cook & Co. report.  “The long-term incentive practices that these early adopters to the FASB proposal are putting in place, ranging from a greater reliance on full-value shares at high tech leaders like Microsoft to increased use of stock appreciation rights at financial market giants like Merrill Lynch, seem to be the wave of the future for Corporate America.”

In March, the FASB released its draft proposal to require companies to expense stock options based on the “fair value” at the grant date as determined by option pricing models. Under current accounting guidance companies may count options as an expense against profits or may report stock option expenses in the footnotes to the financial statements. The FASB plans to announce a final rule on stock option expensing by the end of the 4th quarter.  In July, the U.S. House of Representatives passed a bill (H.R. 3574) to weaken the proposed regulation by limiting the required expensing of options to a corporation's top five executives. The companion bill in the Senate (S. 1890) is stuck in the Senate Committee on Banking, Housing, and Urban Affairs (S. 1890), because the Chairman, Richard Shelby (R-AL), is blocking it.

Frederic W. Cook & Co.’s 2004 annual report, The 2003 Top 250: Long-term Incentive Grant Practices for Executives, finds that whether companies are expensing or not, executive pay is shifting away from stock options toward full-value shares in delivering long-term incentive compensation.  The Cook survey also found:

• There has been a steady expansion in the use of restricted shares for executives over the last few years, from 43% of the top 250 companies in 2001 awarding restricted stock to over half of the companies (54%) in this year’s study.  The use of performance shares and units (long-term cash awards) also increased from last year’s levels.
  
  
• For option expensing companies, the percentage of CEO total long-term incentive value delivered in stock options fell to 58% in 2003, compared to 73% of the total value delivered in 2001.  The shift is similar but less dramatic among non-expensing companies, where stock options fell to 71% of the total long-term incentive value delivered in 2003, compared to 81% in 2001.  Conversely, the value delivered in restricted shares at option expensing companies increased from 17% in 2001 to 29% in 2003.  Non-option expensing companies’ restricted stock value increased from 12% to 17%.
  
  
• While CEO long-term incentive value may be creeping back up slightly from 2003 to 2004; median long-term values fell by 11% at option expensing companies and 19% at non-option expensing companies between 2001 and 2003. 

“It’s clear that the pending FASB regulation as well as continued shareholder pressure, and economic uncertainty are prompting companies to rethink their long-term incentive strategies,” said Ed Graskamp, Managing Director at Frederic W. Cook & Co. “We likely will continue to see more companies using a broader variety of vehicles to deliver a more balanced long-term incentive opportunity.” 

Since 1973, Frederic W. Cook & Co. has extensively researched and published an annual report on long-term incentive grant practices for executives of the largest U.S. companies. This 2004 report, the 32nd edition, is based on the 250 largest companies in the Standard & Poor’s 500 Index (“Top 250”) as reported in the Special Spring 2004 issue of Business Week magazine. Selection of these companies was based on their total market capitalization, i.e., share price multiplied by total common shares outstanding, as of February 28, 2004.

A complete copy of the report is available at: http://www.fwcook.com/Top250cos.

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