AUSTIN, Texas -- Whole Foods Market's employees will still have plenty to celebrate on July 4, analysts said, despite the fact that the company will have to make some changes in the way it compensates its workers by that time.
Beginning on that date, the fast-growing, natural-products retailer, based here, will be required to begin expensing the stock and stock options it has used as a compensation vehicle for all of its full-time employees. That will take a chunk out of Whole Foods' bottom line, but the company is working to minimize the impact on both shareholders and employees, analysts said.
"We will see a reduction in the amount of options given to employees, top to bottom," said Scott Van Winkle, analyst, Adams Harkness, Boston. "I don't think it's going to be a significant impact, though. No one is going to have their options cut by 70% or 80%, but they might have them cut by 10% or 20%."
Without disclosing the details about how it plans to do so, Whole Foods has said it wants to limit the impact of proving equity-based compensation, including options, to 10% of earnings.
A new accounting rule requires all public companies to begin expensing options in the second half of the year. Although other companies in the industry also grant stock and options to their employees, Whole Foods is known to have one of the most extensive programs. The company could not be reached for comment on this issue.
Because all outstanding options that have already been granted will have to be expensed after July 4, Whole Foods said it would accelerate the vesting of currently outstanding options before the deadline, resulting in a one-time charge of $10 million in its third fiscal quarter.
"They made a smart move by vesting all of the out-of-the-money options that were currently outstanding," Van Winkle said. "The first hit to earnings is going to be huge for the companies [that don't take those expenses early.]"
Edward Aaron, analyst, RBC Capital Markets, Denver, said any change to Whole Foods' compensation program will probably be gradual.
"I think Whole Foods is smart enough to know that their option program has been a major factor in their success," he said, adding that he didn't think there would be a "significant change" in the way employees are compensated in the near term.
Other companies that are faced with the same problem have been taking varied approaches, said Russell Miller, a principal in Mercer Human Resource Consulting, New York.
"Companies are re-evaluating their option plans from a cost-benefit perspective," he said. "They want to make sure they are deriving a comparable benefit for employees related to the cost."
One solution, he said, is for companies to provide options in combination with another vehicle, such as restricted shares. Although such shares would still need to be expensed, the company could provide a smaller number of restricted shares because they would be perceived by employees to have a higher value (the restricted shares retain value, even if the stock price declines).
Another method companies have been using to limit the bottom-line impact of their options is to be more selective in how they are awarded. For example, options might only be given to the top 15% or 20% of managers, Miller explained. He said many companies are considering eliminating options completely for lower-level employees.
"There are companies that are taking away the options, but are making them up in other vehicles, such as annual incentive opportunities, or enhanced 401(k) matches," he said.