U.S. companies are moving away from options and toward compensation alternatives such as restricted equity awards and performance share programs, according to new research from Greenwich Associates.

Since the accounting rules were changed, requiring stock options to be expensed at their fair market value, companies have been reassessing their use of options, it notes.

Despite this new expense, Greenwich found that almost 52% of the companies participating in its equity compensation plan study say they continue to offer incentive and non-qualified stock options to certain employees. However, the new research reveals that companies have begun to reduce their reliance on stock options in favour of other offerings, it says.

“While the data does not suggest that companies are scrapping stock option programs entirely, there is ample evidence that companies are scaling back their use of stock options significantly,” it says. Almost 45% of the study participants say they have decreased their use of stock options as a result of the new accounting treatment. “In many cases, companies appear to be reducing the scope of their stock option plans as part of a move away from broad based programs to more narrowly focused stock option compensation plans, often limited to company executives.”

Greenwich says that the shift away from broadly issued options to restricted award programs was already underway before the accounting rule change, which only served to accelerate this move. “Since 2000 stock options have failed to perform up to expectations as companies found that awarding them on a broad basis had little positive influence on hiring or employee retention,” says Greenwich Associates consultant Lori Crosley.

Restricted award programs seem to be the most popular alternative for companies trying to limit their use of options, it found. Among all companies participating in the study, 78% currently offer restricted award programs. “It is important to note that restricted award programs are not the only employee benefits being used as a replacement for or as a supplement to stock options,” adds Crosley. “About 48% of companies are also offering performance share-based programs and another 15% plan to add them.”

The data suggest that companies are getting a mixed reaction to these changes from employees, Greenwich says. Crosley observes, “According to study participants, their employees are split in their response to these shifts, with 45% of companies saying their employees had a positive reaction to the switch away from options and 41% reporting a negative response.”

Almost 45% of participants in the Greenwich Associates study say they have changed reporting or other processes in order to comply with the new accounting rule, and almost a quarter revised their valuation methods in response to the regulation. Only about 10% of companies say they made no changes to internal reporting or valuation processes because they were already in compliance with the requirements imposed by the rule.