Stock options for run-of-the-mill employees are on the decline, a trend that could hurt companies' financial performance, two recent studies from Watson Wyatt Worldwide show.

Companies are reducing their option grants in light of recent accounting rules that require they be expensed, one study showed. Of 265 companies looked at, one-third made changes to their non-executive long-term incentive plans in 2005. Of those making changes, 52% reduced the number of stock options granted, 50% reduced the number of employees eligible for such plans, and 27% eliminated stock options entirely.

Stock-option grants to top executives have been under attack, as they are seen as adding to already excessive compensation. But at lower echelons, declines in such grants are also a governance concern. Fewer performance-based incentives reduce employee motivation, which can hurt shareholder returns just as much as grossly inflated CEO pay can.

That conclusion is supported by a separate study from Watson Wyatt, which found that organizations that maintained eligibility for stock options had better financial performance, said Laura Sejen, national practice director, strategic rewards, at Watson Wyatt.

The study found that "economic theory suggests that stock-based incentive programs are most effective in rewarding executives and senior managers, who have the greatest ability to affect the performance of an entire firm." It also showed that "organizations where nearly all executives and managers are eligible for stock option programs outperformed organizations where eligibility is somewhat more limited."

It divided companies into two buckets - those with "broad eligibility" for options programs and those with low eligibility - and looked at total returns to shareholders over a three-year period. It found that companies that had high eligibility had returns of 57%, while those in the low-eligibility bucket had returns of only 27%.

-By Tiffany Kary; Dow Jones Newsletters; 201-938-4292; Tiffany.Kary@dowjones.com [ 10-05-05 1351ET ]

(c) 2005 Dow Jones Reuters Business Interactive, LLC (trading as Factiva). All Rights Reserved.