While regulators, investors and governance experts applauded the Financial Accounting Standards Board's decision to recommend that stock options be expensed, the reality is that it is much ado about nothing. Or, at the very least, it is another case of too little too late.

First of all, the same day FASB made its announcement, Towers Perrin trotted out a survey showing that investors don't even care about the issue. Based on a study of 335 companies that have already begun expensing options, the firm found that a company's decision to expense stock options has no impact on its stock price.

Towers Perrin tracked the stock prices on the day the company made its declaration, and during the 150 trading days before and 150 trading days after. The consulting firm found that stock performance to be the same, on average, as the 900 companies comprising S&P's 500 and mid-cap 400 indexes.

These results affirm identical findings from Towers Perrin's 2002 study of 103 companies, the company added.

"The event study confirms the view that accounting treatment of incentives does not influence stock prices," said Richard Ericson, a Towers Perrin principal and executive compensation consultant in its HR Services business, who co-authored the study with Towers Perrin consultant Michael Grund. "Investors take full account of the economic cost of options, whether or not such costs are reflected on the income statement."

While expensing stock options doesn't seem to affect the actions of investors, it certainly impacts the bottom line.

According to Standard & Poor's, the new accounting treatment will probably result in a reduction of 7.4 percent in earnings per share reported by the Standard & Poor's 500 companies for 2004. The rating agency noted that 2003 earnings per share would have been reduced by 8.6 percent had companies been required to expense options.

"A change of 7 percent or 8 percent in estimated earnings for the S&P 500 is significant, especially if investors are not fully aware of what caused the change," notes David Blitzer, managing director and chairman of the Index Committee at Standard & Poor's. "While the numbers seem large, the expense has always been there. Until FASB's recent decision, much of it was reported in the footnotes, rather than the income statement."

However, Bear Stearns calculates that the operating earnings of the 100 largest companies traded on the Nasdaq would have been 44 percent lower in 2003 had they been required to expense options, according to a report.

In any case, more and more companies have begun scaling back the awarding of stock options in favor of other stock-related compensation, such as the granting of restricted stock.

Equilar found that the median grant-date present value of stock options (using the Black-Scholes methodology) plunged 27.5 percent, from $4.83 million in 2002 to $3.5 million in 2003. Among CEOs who were awarded options, the number granted declined by 7.5 percent, from 350,000 in 2002 to 323,824 in 2003.

As companies cut back their option grants, however, many are increasing their awards of other non-cash compensation.

Equilar's study revealed that the median value of restricted stock awards came to more than $2.6 million in 2003, up a whopping 39.2 percent from the 2002 level of $1.9 million. And the percentage of CEOs awarded restricted stock rose to 29.1 percent in 2003 from 26 percent the prior year.

And, for those CEOs receiving a long-term incentive plan payout, the median value in 2003 increased by 120.1 percent, to more than $2.2 million, compared with 2002. And the percentage of CEOs receiving these payouts increased to 22 percent in 2003 from 19.7 percent in 2002.

This is just as well. Employees at U.S. companies discount the value of stock option grants anyway, by 30 to 50 percent relative to the options' actual value, according to a Watson Wyatt survey of nearly 650 high-income employees who received stock option grants.

This finding, along with FASB's proposed rule, should further reduce employers' use of stock options as incentives, Watson Wyatt added.

"It will become increasingly hard for companies to justify offering a benefit that costs one dollar while employees value it at only 50 to 70 cents," said Ira Kay, national director of compensation consulting at Watson Wyatt, in a statement. "Employers will need to find more cost-effective ways to compensate and motivate their employees."

On the other hand, these high-paid employees place a much higher value on shares of restricted stock, Watson Wyatt found.

The survey found that the average discount placed on restricted stock is only 18 percent. These values imply there are opportunities for employers to reduce their stock-based compensation costs by 20 to 30 percent by converting their stock option plans to restricted stock grants, the consulting firm added.