Are Stock Options Ready for an Encore?

For years, PSUs have been the headliner in long-term incentive design built to showcase alignment with shareholder goals. But lately, PSUs have been critiqued by some investors as overly complex, costly, and—ironically—not as tied to performance as once thought. Meanwhile, proxy advisors are warming up to the idea that time-based equity with longer vesting might be a credible substitute. Could this shift in sentiment set the stage for an old classic to make its return: the stock option?

FW Cook thinks the timing might be right. Stock options are currently used by 48% of the Top 250 companies (down from 70% in 2011, and 79% in 2008).

 Here’s why stock options could be gearing up for a comeback:

1. Keeping the Leverage Alive. Swapping PSUs for restricted stock units removes the natural upside and downside tension investors expect in LTI plans. Stock options, by contrast, pack inherent leverage, often with a decade-long runway for executives to turn performance into payoff.
   • Example: a 50% RSU / 50% Stock Option grant at $100,000 value would provide more upside leverage than a 100% RSU award if the stock price increased 4.1% over a ten-year period.
2. Redefining “Performance-Based.” While institutional investors may dismiss time-based RSUs as less aligned to performance, they often still view options as performance-based. Layer in stock price hurdles or premium-priced strikes, and options suddenly look like an appealing compromise between simplicity and rigor.
3. Volatility as a Feature, Not a Bug. With today’s market swings, executives may see options as more opportunity than risk. Employers, too, may appreciate efficiency: stock options can stretch the share pool further, even in turbulent times.

The Bottom Line: If companies start rebalancing away from PSUs and toward time-based equity, stock options might slip back into the LTI mix as a practical way to balance leverage, investor expectations, and market realities.