Exploring Options

The problem with taking a bold step is that often you can't take just one. With institutional investors and policymakers urging them on, dozens of companies have decided to sign on to the reform movement sweeping boardrooms and begin deducting the cost of stock options from their reported earnings. But that is compelling companies to confront another, far more complex issue: If options aren't going to be free anymore, should companies now seize this opportunity to overhaul their entire incentive-pay system? Indeed, should they try to get more bang for their buck with other tools to motivate employees and make them think like shareholders? Or should they merely scale back their options grants to prune the cost?

The choices involve billions of dollars. American Express Co. (AXP ) alone issues options worth about $200 million each year. And time is short: Companies with calendar fiscal years must finalize their plans by early March to include them in proxy statements for this year's annual meetings. Without shareholder approval, the new schemes may not be tax-deductible. "It is a hot issue," says Peter T. Chingos, head of the compensation practice at Mercer Human Resource Consulting LLC. "There isn't a boardroom that I walk into that is not contemplating some action."