Compensation and Working Conditions Winter 1999 17

National Compensation Suvey

BETH LEVIN CRIMMEL

JEFFREY L. SCHILDKRAUT

National Compensation

Survey Collects Test

Data on Stock Option

Plans

How important are stock options in the United States

economy? The National Compensation Survey (NCS)

program is currently testing the feasibility of collecting

publishable data on the incidence of this well publicized

employee benefit. This article discusses the test procedures used to identify the incidence of stock option plans.

Beth Levin Crimmel and Jeffrey L. Schildkraut

are economists in the Division of Compensation

Data Estimation, Bureau of Labor Statistics.

Telephone: (202) 691-6274

E-mail: Crimmel_B@bls.gov

Schildkraut_J@bls.gov

Over the past few years, the Bureau of Labor Statistics (BLS)made substantial progress towards integrating three Office of Compensation and Working Conditions

(OCWC) surveys—the Employment

Cost Index, the Employee Benefits

Survey, and the Occupational Compensation Survey—into one comprehensive program, the National Compensation Survey (NCS). Goals for the

NCS include establishing a common

sample, database, and set of procedures, and reducing the time and resources required of both survey respondents and BLS field economists.

The NCS must have the flexibility

to reflect new and significant compensation practices in both the private and

government sectors. One of the most

talked- and written-about aspects of

employee compensation in recent

times is the granting of stock options.

Historically, stock options usually were

awarded only to high-level executives

in a firm. Today, they are increasingly

granted to employees outside the executive ranks, including lower-level

managers, computer programmers,

production workers, and others

throughout the organization.

While there have been some surveys and much anecdotal evidence reported in the media, there has been no

statistically sound, national survey to

measure the actual extent to which

stock options are offered.

Because BLS is committed to keeping up with changes in compensation

practices, NCS designed a test to collect data on the incidence of stock option plans throughout the economy.

Stock option plan incidence measures

the percent of private industry employees covered by such plans. Although

the main objective of the test is to publish data on incidence, information

relating to plan costs may also be reported.

What are stock option plans?

Stock option plans are only available

to employees of for-profit, private sector companies. They can be very complex, but the basic concept is simple:

The Wall Street Journaldefines a stock

option as “the right to buy a stock at a

fixed price by a fixed time.”1 For example, ABC Corp. is offering all employees the option to buy up to 100

shares of its stock at a cost of $10 a

share within the next 10 years. The
18 Compensation and Working Conditions Winter 1999

grant price of $10 a share is the current market price of the company’s

stock. If the stock’s price increases to

$15 a share, employees with an option to purchase 100 shares at $10 can

pay $1,000 and end up owning $1,500

worth of stock. They can hold their

shares and hope the value continues

to increase, or they can sell them for a

$500 profit.

By tying a portion of employees’

compensation to the company’s stock,

stock option plans, in the view of many

compensation analysts, are intended to

motivate employees to increase their

productivity.2 Employees may only

profit with a rise in the price of their

company stock.

There are often a variety of complex restrictions on the actual exercise

of options. Just like pension plans,

most stock option plans have vesting

schedules that require employees to

wait a certain length of time before

they are eligible to purchase shares.

Some plans allow employees to purchase, over time, an increasing portion of a predetermined number of

shares. Employees have a maximum

time frame during which they must exercise their options. Options expire

on predetermined dates. An employee

may choose not to exercise an option

by not purchasing shares during the

allowable time frame.

Some companies offer “cashless

exercises” so employees can buy their

shares at the option grant price and

sell them at the current market price

in one transaction. A brokerage firm

purchases the shares for the employee

at the option price, then immediately

sells them at the market price. This

allows employees to receive the difference between the option price and

the market price, without a cash layout.

The tax and accounting rules for

stock options can also be very complex. Different types of options have

different tax liability consequences for

the company and the employee. Publicly-held companies must disclose the

potential effect of stock options in their

financial statements or as footnotes to

those statements.

Two-phase implementation

There are two phases involved in the

inclusion of stock option plans in the

NCS.

Phase 1

This phase evaluated the effectiveness

of a questionnaire designed to collect

stock options data. The test sample

was developed in an unusual way.

Because the goal was to gauge the validity of the questionnaire, only companies already identified as having

stock option plans were surveyed. Information from the National Center for

Employee Ownership (NCEO) was

used to compile the sample. Due to

the nature of the source data, tabulated

phase 1 data should not be used as an

estimate of the incidence or characteristics of stock option plans.

The initial questionnaire contained

10 questions about stock option plans

for two separate employee groups, (1)

executives and senior managers and

(2) other employees. It also contained

questions about company data, such as

industry, employment size, and recordkeeping practices.

Timing. Phase 1 consisted of several

steps. Testing began in April, 1999

with the initial selection of 100 companies from the NCEO member list.

For test purposes, selected companies

met three conditions: They employed

100 or more employees at the time of

selection; they had no current involvement in other Bureau OCWC compensation surveys; and they were companies for which appropriate corporate

contacts in financial operations or human resources could be located.

Company selection and data collection extended from April 5 to July 30,

1999 (see box). Phase 1 testing included three separate mailings as well

as follow-up phone contacts, if necessary. On May 20, an initial pre-notice

letter was sent to the 100 companies

selected for the survey. The mailing

was intended to pique respondent interest and inform them that they had

been selected for the survey. The iniCollection Summary, 1999

Process steps

April 5 – May 14 Company selection and refinement

May 15 Refinement completed

May 20 Pre-notice letter mailing

May 28 Initial test survey mailing

May 28 – June 18 Period of collection for initial request

June 18 Second test survey mailing

June 28 – July 30 Telephone follow-up and questionnaire

 recontact

Total collection period

 Questionnaires mailed ............................ 100

 Questionnaires completed ....................... 73

 Mail ...................................................... 57

 Fax ....................................................... 9

 Telephone ............................................ 7

 Questionnaires lost

 Nonresponses ...................................... 22

 Refusals .............................................. 3

 Other unit losses (acquisitions) ............ 2

Initial mailing responses

 Mail responses ..................................... 21

Second mailing and follow-up responses

 Total ........................................................ 52

 Mail ...................................................... 36

 Fax ....................................................... 9

 Telephone ............................................ 7

Number of

questionnaires
 Compensation and Working Conditions Winter 1999 19

National Compensation Suvey

tial questionnaire mailing was completed on May 28, with a requested

return date of June 18. As expected,

some companies returned their surveys

promptly, others needed a reminder.

Follow-up letters and a second copy

of the questionnaire were mailed on

June 18, with a deadline date of July

2. Starting on June 28, non-responding companies were contacted by

phone to verify that the questionnaire

had arrived. These units were then

given the alternative of providing stock

option plan data over the telephone or

via fax. Completed questionnaires

were accepted through July 30.

Collection. During the collection period, 73 completed questionnaires

were received—57 via mail. During

the initial collection period (May 28-

June 18), 21 mail responses were received; and during the second collection period (June 18-July 30), an

additional 36 were received. Nine

companies opted to return their questionnaires via fax and seven others

chose to provide the information over

the telephone.

Information was not available for

27 companies. Twenty-two companies

did not respond to the questionnaire

(no data were provided), 3 refused to

provide information, and 2 were acquired by other companies during the

collection period. None of these companies were replaced in the sample.

There were 37 completed questionnaires from construction or manufacturing companies and 36 from service,

trade, or transportation companies.

The sample selection was biased toward high tech establishments (communications, computer software companies, hardware manufacturers and

suppliers, and biotechnology firms) because they composed the majority of

the NCEO member list.

Results and analysis. When reviewing the results of the phase 1 questionnaire, it is important to remember that

the sample of companies used was not

designed to be a statistically representative sample of the economy. The

questionnaire’s goals were to determine the effectiveness of the test questions and the survey process, not to

measure the incidence of stock option

plans (each company was identified as

already having a stock option plan).

Each questionnaire sought data for

the entire company, not an individual

establishment or physical location (as

is done for the rest of the NCS). Unless otherwise noted, all questions were

asked about two separate employee

groups, (1) executives and senior managers and (2) other employees. Results are based on the 73 questionnaires received during the collection

period. The following selected questions discuss the responses of the 68

companies with approved stock option

plans. Some questions allowed multiple answers. ( See table 1.)

• Have the owners/stockholders

approved a stock option plan?

As expected, most companies stated

that the owners/stockholders had

approved a stock option plan. The

results also showed that the majority of companies in the sample provided stock option plans to both executives and senior managers and

other employees. Of the 68 companies with an approved plan, 82

percent distributed stock options to

at least some employees in both

groups.

• What year was the stock option

plan (initially) approved?

Based on the average number of

years prior to 1999 that the stock

option plan was approved, the average length of time since approval

of a stock option plan was 5.2 years

for plans for executives and senior

managers and 4.5 years for other

employees.

TABLE 1. Responses to selected questions from a stock option plans test survey, 1999

Have the owners / stockholders approved a stock option plan?

Total responses ................................................................. 73 73

Yes .............................................................................. 68 64

No ................................................................................ 5 9

Was the most recent grant a one-time event

 or part of a regular on-going plan?

Total responses from companies with approved

 stock option plans ........................................................... 67 64

On-going ...................................................................... 59 50

One-time ...................................................................... 8 14

In the most recent grant, what types of options were granted?2

Total responses from companies with approved

 stock option plans ........................................................... 67 62

Non-qualified stock options (NSO) ............................... 56 44

Incentive stock options (ISO) ....................................... 44 33

Other ........................................................................... 3 0

For the most recent grant, which criteria determined the

 number of shares granted?2

Total responses from companies with approved

 stock option plans ........................................................... 64 63

Individual performance ................................................. 51 57

Salary / pay .................................................................. 38 41

Company performance ................................................. 32 17

Equal size3 ................................................................... 4 5

Other ........................................................................... 5 7

Survey question1

Executives

and senior

managers

Other

employees

1

Questionnaires were designed to determine the effectiveness of the survey questions and the process. Tabulations do not

reflect average incidence or plan levels.

2

 Multiple answers were allowed for this

question. 3

 Equal size grants for all plan participants.
20 Compensation and Working Conditions Winter 1999

• Was the most recent grant a onetime event or part of a regular,

on-going plan?

The vast majority of companies

with approved stock option plans

used on-going plans as opposed to

one-time-only grants. The percentage of companies with on-going

plans for executives and senior

managers was higher (88 percent)

than those for other employees (78

percent).

• In the most recent grant, what

types of options were granted?

(This question allowed multiple

answers.)

Non-qualified stock options3 were

the most common options granted.

However, many companies also

granted some degree of incentive

stock options4 to both employee

groups.

• For the most recent grant, which

criteria determined the number

of shares granted?

(This question allowed multiple

answers.)

For both employee groups, individual performance was the criteria used most often for determining the number of shares granted

(80 percent of the time for executives and senior managers and 91

percent of the time for other employees). Salary and pay level were

also important criteria for determining the size of stock option

grants. Company performance

played a more important part in

shares granted to executives and

senior managers than it did for

other employees.

• Which department is responsible for record-keeping for the

stock option plan?

(This question allowed multiple

answers.)

The finance or accounting department was selected by 58 percent of

the 68 companies with approved

stock option plans as a department

responsible for record-keeping.

Human resource departments were

responsible in 39 percent of the

companies. (See table 2.)

Phase 2

In winter 1999-2000, BLS will launch

phase 2 of the NCS inclusion of stock

option plan incidence data. The

sample for phase 2 will be a statistically valid, national sample of about

2,000 companies.

In addition to the tested and improved mail survey, plans now call for

respondents to have the option of supplying company information using a

secure Internet site developed for the

NCS program. This will be the first

time that such a collection vehicle is

used by NCS.

Phase 2 results will be available in

the summer of 2000. A future article

in this publication will discuss phase

2 findings.

Finance / accounting .......... 40

Human resources .............. 27

Legal .................................. 12

Other ................................. 7

1

 Multiple answers were allowed for this

question.

Number of

times

selected1

Department

 1 Wall Street Journal, April 8, 1999.

 2 The National Center for Employee Ownership (NCEO) Internet site at http://www.nceo.org.

 3 Non-qualified stock options (NSO)—Under the Internal Revenue Code, a non-qualified

(or non-statutory) stock option is taxable as wages

(and deductible by the employer) when exercised

by the employee. The employee does not generally recognize taxable income at the time the stock

option is granted. NSOs can be issued with an

exercise price below the fair market value of the

stock. When the NSO is exercised, the spread (difference between fair market value and exercise

price) is taxed. After the NSO is exercised, any

future appreciation will be taxed as a capital gain

when the stock is sold. 4

 Incentive stock options (ISO)—Under Internal Revenue Code, an incentive (or statutory)

stock option is not taxable to the employee or deductible by the employer either when granted or

exercised. The employee is taxed when the stock

acquired under the option is sold, exchanged, or

transferred by bequest or inheritance. An ISO

cannot be issued with an exercise price below the

fair market value of the stock, but after the stock

appreciates, the option can be exercised without

being subject to tax on the spread (difference between fair market value and exercise price). If

the sale price is higher than the exercise price, this

profit is taxed as a capital gain.

TABLE 2. Department responsible for

stock option plan record-keeping, 1999