'Opting' for pay alternatives: as the debate continues over stock options, there is a pronounced shift toward more rational, results-based pay systems. This is particularly true at the most senior levels.

• Author: McDonald, Paul
• Position: Compensation

Major changes are afoot in compensation. In August, the Financial Accounting Standards Board (FASB) began the final draft of a rule that will require companies to recognize the cost of employee stock options on their income statements. FASB originally slated the accounting change to begin in 2005, although requests for a delay until 2006 are being considered. With this shift looming, much of the discussion has focused on how stock options should be valued.

Less attention has been given to how the potential move away from using options as a compensation tool might affect employers' ability to attract, motivate and retain talented employees, particularly at senior levels. But as the accounting change prompts firms to explore alternative forms of pay, they will also want to factor in the impact of an employment market that seems positioned for a turnaround.

CFOs are projecting a net 6 percent gain in the hiring of accounting and finance professionals during the fourth quarter, according to Robert Half Management Resources' (RHMR) quarterly Financial Hiring Index. The projection a year ago was for just a 1 percent rise, which indicates that businesses today appear to be gearing up for growth. Moreover, competition is heating up for the best candidates. In another survey conducted by RHMR last January, 18 percent of CFOs said that finding qualified staff was one of the biggest challenges facing their companies over the next 12 months.

Despite signs of an upturn, in the short term, at least, we're unlikely to see a return to the frenetic hiring pace of the late 1990s, when demand for talent exceeded supply and lucrative pay packages built on stock options were the norm. Nonetheless, top candidates are finding themselves with more choices than they had two years ago.

If companies are to attract and keep the best people as the job market improves, they will need to ensure their compensation plans remain competitive. But with compensation trends in flux, what constitutes an enticing pay package? A decade ago, the answer was easy: options and more options. Today, it's not so clear-cut.

Forces Driving Change

Several factors have forced companies to rethink their approach to incentive compensation. Most significant is the FASB ruling. In the wake of well-publicized accounting scandals, moreover, there has also been a public backlash against the heavy use of options to compensate employees. Some contend the practice has hurt shareholders by diluting...