At least one facet of the New Economy looks likely to survive.
By Jinny St. Goar
December 2000
Institutional Investor Magazine
Stock options, once the exclusive purview of graying senior executives, now appear in the compensation packages of even low-level company employees.
The number of Americans receiving stock options jumped from 1 million in 1990 to 10 million in 1999, reports the National Center for Employee Ownership, an Oakland, California,based research firm. Ten years ago nonexecutive employees, vested options totaled perhaps $50 million. As of early November this year, they were valued at some $500 billion, says NCEO executive director Corey Rosen.
A handful of big companies, including PepsiCo, Pfizer and Fairchild Corp., introduced their companywide stock option plans in the late 1980s. But the trend really took off in the mid-1990s at technology companies like Microsoft Corp., Intel Corp. and Cisco Systems. Although dot-coms may have popularized the concept, larger, blue-chip tech firms have actually generated far more stock options.
Certainly, $500 billion is a far cry from the $1.8 trillion that now resides in the 401(k) plans of more than 40 million Americans, but the figure is large enough to attract the close attention of the defined contribution providers that hope to manage the administration of option plans as well. At the moment, brokerage firms dominate that arena. “All the major defined contribution players are looking at this,” reports Richard Koski, a principal with Buck Consultants.
One traditional defined-contribution-plan provider, CitiStreet, a joint venture of Citigroup and State Street Corp., is making an early overture to stake out this turf. By January the firm expects to deliver to one of its clients the prototype of a jointly administered 401(k) and stock option plan. Charles Schwab Corp. will be close on CitiStreet’s heels with an education program of its own for 401(k) and stock option plans in the first quarter of 2001.
At some companies, the value of stock options already eclipses that of 401(k) assets. At Intel vested options were recently valued at $7.8 billion, while the company’s 401(k) plan had only $5.5 billion in assets.
Typically, corporate human resources departments manage 401(k)s, and finance departments assume responsibility for stock option programs. That’s partly a legacy of the days when one person in the treasurer,s office took care of the stock option plan for a handful of senior executives.
As stock option programs migrate to human resources departments and defined-contribution-plan providers take charge of their administration, the providers will likely find that they have their work cut out for them.
“The administration of stock option plans looks like that of 401(k) plans about five years ago,” says Martin Phillips, director of the corporate client group of Salomon Smith Barney. Option plans typically do not include Web access or voice response units , the new bells and whistles for 401(k)s.
Salomon Smith Barney and Merrill Lynch & Co. are the two largest administrators of stock option plans. Salomon Smith Barney services about 1,000 plans, with a total of 2.6 million participants and approximately $100 billion in vested options. Merrill services about 440 stock option plans, with about 1.1 million participants and some $80 billion in vested options.
Stock option plans generate significant revenues for plan providers. There’s generally a base administrative fee (anywhere from $10 to $100 per employee), as well as the brokerage commissions, usually between 6 cents and 15 cents a share, that arise when employees exercise their options.
For that reason brokerage firms will fight to hold on to their market share. “We are responding to the desires of compensation specialists who are looking for Web access, voice response units and the like for their stock option plans,” says Salomon’s Phillips.
Dan Roccato, Merrill Lynch’s director of executive advisory services, which runs the firm’s stock option plan business, suggests that not every company will want to link its 401(k) and stock option plans. Defined contribution plans are regulated by the Internal Revenue Service and the Department of Labor, while stock options are regulated by neither.
For sponsors that do want to connect their plans, the Web offers many attractive options. “The beauty of the Web,” says consultant Koski, “is you can have different plumbing or different platforms for the two programs , 401(k)s and stock options , and the employee sees only one aggregated site.”
If that happens, though, another problem presents itself: With information about an employee’s 401(k) and stock option holdings brought together on one Web page, many employees will clearly see , often to their chagrin , just how dependent they are on the performance of their company’s stock. “Employees could be seeing for the first time that as much as 80 percent of their financial assets are invested in a single stock,” says Koski. In that case, plan sponsors may find that they have to come up with other options.
