Stock Option "Overhang" And Stock Price Volatility.

• Author: Marshall, Jeffrey
• Position: Watson Wyatt Worldwide survey - Brief Article - Polling Data

Is stock option "overhang" a boon or a burden to shareholders? A new study by Watson Wyatt Worldwide indicates that firms with high stock option overhang have greater stock price volatility. By contrast, companies whose executives and employees directly own more shares experience lower stock price volatility and achieve better financial results.

Stock option overhang is defined as the number of stock options granted, plus those remaining to be granted, as a percentage of a company's total shares outstanding. Watson Wyatt research has consistently shown that there is an overhang "sweet spot" where the incentive and dilution effects are balanced for maximum benefit to both employees and shareholders. Overhang has grown because of much larger executive option grants and increased option eligibility.

"Over the past decade, stock option overhang has grown dramatically, to an average of 13 percent at a typical firm," says Ira Kay, national director of compensation consulting at Watson Wyatt. "The increased use of stock options has generally been healthy for both companies and the equity markets, but higher overhang levels also appear to be having a significant effect on...