Time Warner recently announced that it would no longer be granting stock options to most of its 85,000 employees. The company is not alone. Suddenly, for many corporations, stock option awards are simply too expensive.

New accounting regulations mandated by the Financial Accounting Standards Board [FAS 123] require companies to expense the cost of options programs for the first time. The regulations, which are being challenged and could end up being delayed, also change the treatment of employee stock-purchase plans, which allow employees to buy stock at a discount.

In response, according to Peter Chingos of Mercer, the leading human resources consulting firm, many of the largest American corporations are reviewing their long-term compensation programs. Most will likely limit the future granting of options and, possibly, other equity incentives. For many, however, the changes are overdue, and responsive to a variety of pressures.

Do we care? Yes; we are naive enough to imagine that aligning the interests of management and employees is productive, and should be encouraged.

Over the last 20 years, a number of factors have quieted the expensive demands of organized labor. Many observers would cite the broadening of equity ownership to as many as 25 million American workers through option and stock grants as contributing to this happy trend.

Stockholders, after all, tend to view profits as a good thing.

However, according to Mr. Chingos, poor market conditions in recent years have diluted the impact of these programs, causing an unprecedented increase in equity awards by managements hoping to keep employees “whole” and happy. The result has been increased opposition to the outsize programs by shareholder interest groups.

The new regulations are due to take effect in July and will impact the last two quarters of the year. Many companies have already adopted the changes, and the impact varies considerably. Most affected are startup or cash-poor companies that rely on equity incentives to pay employees.

Companies in Silicon Valley are howling because that industry is especially dependent on the use of options, which parlay high expectations into acceptable compensation packages and, indeed, create occasional millionaires.

Mr. Chingos cites other factors beyond the new regulations that are encouraging change. During the last five years especially, corporations have adopted equity incentives, mainly options, for a wider swath of employees. Whereas it used to be that such awards were made mainly to the top echelons of management, many companies have brought the use of options down to middle-management personnel and lower.

As a result of these varied factors, the so-called “burn rate,” or the amount of outstanding shares being awarded annually, has been creeping up. Historically, companies would hand out about 1% of total shares outstanding each year; more recently, the figure has crept up to as much as 3%.

Needless to say, this ultimately causes substantial earnings dilution.

Another measurement of the change in compensation practices is the overhang of stock that has been awarded but not yet granted under existing plans. Historically not a very large figure, now it can be as much as 18% – 20% of all shares outstanding.

What are companies doing about all this? Many are turning to restricted stock awards or to issuing performance stock instead. At the end of the day, many will hand out fewer equity incentives and to a narrower group of employees.

Reluctantly, managements of some companies have realized that at some level, employees are just as happy to receive cash, especially in those cases where the company’s stock has languished and options awarded in the past haven’t been fruitful.

According to Mr. Chingos, the effectiveness and appeal of equity awards have a great deal to do with corporate communications. A company like PepsiCo, which sets the standard for company-wide stock ownership, spends considerable time and effort developing shareholder literacy in-house. The employees not only own PepsiCo stock, they follow the stock and understand the implications of ownership.

Though most companies may yet pursue the equity incentive route, the new regulations, as well as the pestering of shareholder interest groups will undoubtedly narrow the use of these awards. Let us hope that the trend does not significantly reduce the ongoing broadening of the “owner mentality” among American workers.

Reach Ms. Peek at lpeek@nysun.com.