Major Trends In Equity Compensation During The 21st Century: A Celebration Of Our 15th Anniversary

Happy birthday to us! In June 2015, we at myStockOptions.com celebrated the 15th anniversary of the website's launch. We have seen a lot of changes in equity compensation since myStockOptions.com went live in June 2000. As part of our 15th-anniversary celebrations, our editor and content-manager Matt Simon has written an article that reviews, in rough chronological order, some of the major issues and developments in equity compensation that we have witnessed and covered since the end of the 20th century, including:

• the stock option boom of the late 1990s
• option expensing
• the rise of restricted stock and RSUs
• the backdating scandals
• pay for performance
• the surprising resilience of ESPPs in the age of expensing
• AMT politics in Congress
• Dodd-Frank rules for executive equity comp
• key IRS changes in tax-return reporting

Below is an excerpt of the article, which you can read in full at myStockOptions.com (no sign-in is required).

From The 1990s Through 2000: The Democratization Of Stock Options In The Dotcom Boom

For most of their quiet history, stock options were an elite form of equity compensation, largely for senior executives and directors. As everybody knows, this changed during the 1990s. Technology startups and other fast-growing companies found that stock options perfectly suited their need to attract and retain bright talent on a low cash flow. The popularity of options brought them prominently into the public eye. (In 1997, stock options were even featured in an episode of the TV sitcom Seinfeld.) The lure of stock option wealth after a successful IPO helped many of today's top technology companies expand and flourish into the giants they are today.

By 1999–2000, when myStockOptions.com was developed and launched, there was a frenzy over stock options in the tech industry. Our files of news articles from that time reveal vibrant references to ambitious employees who "crave" or "lust for" stock options. The wealth-building leverage of options was expressed as "the stock option dream." In Silicon Valley, the biggest market for tech options, newspapers such as the San Francisco Chronicle and the San Jose Mercury News assigned reporters expressly to cover the stock option beat. In their pages, articles on option financial planning became as normal as tips on home-buying or personal banking.

This business trend democratized stock options, bringing them down from the lofty heights of Mt. Executive into the workaday foothills of middle-class people who in an earlier era might never have heard of them. And it wasn't just the technorati who derived the benefits. Many "stock option millionaires" included people not on the front lines of technological innovation. For example, one of Google's in-house masseuses became a millionaire from stock options granted to her in 1999.

myStockOptions.com was born into a world where options, and other forms of stock compensation, had the potential to change anybody's life. You no longer needed elite family or business connections: just the right equity incentives and a lot of honest, hard work. Equity comp had become a wealth-builder for the masses, both in the United States and elsewhere in the world.

2001–2006: Underwater Options, Mandatory Option Expensing, And The Rise Of Restricted Stock And RSUs

Long before the financial crisis and recession of 2008–2009, the phrase underwater stock options had become painfully known to many people and their companies. The stock-market downturn of 2000–2002 revealed one of the weak points of options: they were, at least temporarily, worthless if the company's stock price fell below the exercise price of the options. However, after the options-fueled growth of the 1990s, much of corporate America had come to depend on robust equity incentives to draw and keep the brainpower they needed.

As a result, talk turned to alternatives for stock options. The expected change in accounting rules that finally came with FAS 123(R) (now called ASC Topic 718) also encouraged this discussion, as soon all grants would need to be expensed on the company's income statement instead of merely appearing a footnote. Now that stock options were losing their favored accounting treatment, companies had an additional financial incentive to consider other types of grant that could fit their approach to compensation.

Many types of equity award were bruited about, but one in particular was taken up widely. From the ashes of the downturn, restricted stock and restricted stock units rose up and started to gain widespread favor. Like stock options, restricted stock had previously been an obscure form of senior executive compensation—not a pay practice for lower-level executives or regular employees. However, it emerged into the corporate limelight in 2002 as the best broad-based alternative to stock options because, as a "full value" award, it was downturn-proof: a grant of restricted stock is always worth something (unless the stock price falls to zero). In fact, many observers foretold that restricted stock would become the new stock options.

They were half right. As events have unfolded, it is the unidentical twin of restricted stock—restricted stock units, or RSUs—that has become the most popular alternative to stock options at many companies. You are now more likely to receive RSUs than restricted stock. The use of restricted stock and RSUs at companies has continued to grow. While not granted as broadly to employees as stock options were during their heyday, they have joined stock options among the top forms of equity compensation. Many executives now have portfolios of various types of equity awards, including stock options and restricted stock/RSUs.

We at myStockOptions.com spotted this trend as it became evident during the downturn of 2000–2002. Our coverage of restricted stock and RSUs may, in fact, now rival or even exceed our coverage of stock options. While myStockOptions.com has become our trusted brand name, we could just as well be called myRestrictedStock.com (in fact, we own the URL!). This is no exaggeration: our varied content on restricted stock/RSUs includes articles, FAQs, podcasts, calculators, quizzes, and even self-study courses for continuing education credits. myStockOptions.com also has special tools dedicated to financial planning with restricted stock and RSUs.

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To continue reading this historical review, which covers developments right up to the present day, see the full article at myStockOptions.com (no sign-in is required).