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Tech Industry

Tech companies help water down stocks

Compensating employees with stock and options, a popular practice in the Net heyday of the late 1990s, leads to a drop in stock value and a rise in investor worries, a study shows.

Something else to blame on technology companies: stock dilution.

Compensating employees with stocks and options, a practice made popular by technology firms during the Internet's heyday in the late 1990s, has helped lead to a drop in stock value and a rise in investor worries, according to the Investor Responsibility Research Center (IRRC), a Washington, D.C., research firm.

"You slice the pie into thinner pieces, and that's bound to cause concern among those sitting at the table," Carol Bowie, director of corporate governance services at IRRC, said in a statement. "Every time you issue more stock, you dilute the voting power as well as the earnings and assets per share."

In a study of the Standard & Poor's 1500 companies last year, the IRRC calculated the level of dilution to be 14.6 percent, up from 13.4 percent in 1999. Among S&P 500 companies, the level rose from 11.4 percent in 1999 to 13.1 percent in 2000.

The problem has not gone unnoticed by financial authorities. The New York Stock Exchange, the Securities and Exchange Commission, and the Nasdaq exchange are investigating it, according to the IRCC.

The SEC is considering a proposal by the NYSE to require shareholder approval for certain kinds of stock-based incentive programs. In the past, shareholders generally had little say over broad-based compensation plans, the IRRC said.

The IRRC said the "spectacular wealth" generated through stock compensation was a key factor in the spread of the practice.

The IRRC calculates dilution for a company by dividing the total number of shares and options it uses in equity-based compensation plans by the total voting power of shares currently outstanding.