Gone indeed are most of the frills and folly of dot-com-era compensation and perks. Workers are lucky to have jobs and base salaries these days. In fact, it's been a long time since anyone offered to take less salary and more stock options, the gold standard of compensation packages during the dot-com boom. "We've had no requests of that nature lately," notes Dan Sullivan, vice president of human resources (HR), at Qualcomm Inc., San Diego.

Stock options are tarnished by two factors. With technology stocks still depressed, options are less appealing to workers. There's also the possibility that companies will have to take options as an accounting expense, although they seem to be in denial about that fact.

"Cash is in. Stock is out," says Bob Miller, a principle in the San Francisco office of Mercer Human Resource Consulting Inc., New York. Miller, who advises electronics companies on compensation matters, says all his clients are rethinking options. "The problem is exacerbated by the stock market, but the Financial Accounting Standards Board (FASB) is going to put a dagger in the heart of options."

Compensation planning used to be easier. If option grants were generous, employees were forgiving of below-market salaries and bonuses. Not any more. The options/cash conundrum is one of many compensation issues companies face. Others include how to balance pay among base salary, merit increases and variable pay and what to do about rising medical costs.

With all the layoffs, salary freezes and pay cuts of the past two years one might think employees would just be grateful to have jobs-a fact companies could exploit in their compensation practices. Not so.

"There are companies that could make a case for lopping salaries by 30% right now," says Peter LeBlanc, senior vice president in the Raleigh, NC, office of Sibson Consulting, a subsidiary of Segal Co. "That's not happening, because if you cut people's pay by 10% to 30% they're going to be gone as soon as the economy recovers. Employees have a very long memory."

As a result of these trends, companies are adopting an array of pay strategies. The place they appear to be procrastinating is planning for expensing options. Yet experts say there are actions companies can take now to deal with the likelihood that they will have to expense options.

Electronics companies still see options as important compensation, in part because they are so ingrained in the culture. They tend to view options now as they did before the dot-com frenzy: As part of a retention strategy, not as a substitute for pay. Because they also are saddled with underwater options and anemic stocks, they have revamped practices.

"Most of our clients have adopted a wait-and-see attitude about how options will be handled from the accounting side," says Miller. "In the meantime, they've had to restructure compensation packages so they are stronger on the base salary and the incentive side, but the options are reduced."

Until recently, Miller says, many companies were paying below market salaries, relying instead on options. They've had to get back to at least the 50th percentile in salary, while cutting option grants. He doesn't see that trend changing soon.

However, it's an excellent time for the few new hires to get options. "With stock prices low, people still want options, but they've put the pressure on cash," says Dan Moynihan, a principle who runs the high-tech practice at Compensation Resources Inc., Upper Saddle River, NJ. He says more companies now offer options to fewer employees and tie them to performance.

Like most, Qualcomm benefited from the stock price run-ups of the bubble days. And it's stock has tumbled like everyone else, only not as far. "We have been growing revenue, and we have been profitable," Sullivan says. "We continue to have stock option grants that remain in the money. We see options as an important retention element, even during this downturn."

Companies also are adopting better ways to manage options. National Semiconductor Corp., Santa Clara, CA, recently changed from yearly to quarterly grants to help avoid underwater options, says Ed Sweeney, senior vice president of worldwide HR. He says the extra paperwork is minimal because they automated the process years ago. "I would say job candidates are still looking for options as a long-term incentive, particularly because prices are at a premium now," he says.

At National Instruments Corp., Austin, TX, options vest over five years and 10 years, instead of the more customary three. Mark Finger, vice president of HR, says that makes options a true long-term incentive. Vesting of 10-year options, which are used mainly for executives, can be accelerated based on company performance, he adds.

These HR executives are hoping options will not be expensed. Compensation experts believe, however, that option expensing is virtually a done deal, and companies should consider strategies now.

Joe Rich, executive vice president, Clark/Bardes Consulting, Barrington, IL, assumes FASB will rule soon that options must be expensed, but the rules won't take effect until 2004. That being the case, there are several things companies could do. One alternative is to grant more options in 2003 to avoid expensing them, but change vesting to start the clock in 2004. To do this, companies would need shareholder approval sooner rather than later, he says. He also urges companies to seek shareholder approval now of broader restricted stock plans. When expensing rules are the same for options as they are now for restricted stock, the latter may have greater appeal, Rich argues.

Workers lucky enough to have jobs also understand the downside of options. They know that cash bonuses and merit increases are harder to get when business is bad, so base salary is more important to them.

Most experts estimate compensation at electronics companies will increase in the 4% range next year (see table, below). "It's surprising in this lousy market to think they can afford this," says Rich. "I think it's a reflection of the demand side. Employees recognize they need to eat, and the base salary is all they can count on."

But companies emphasize pay for performance as never before. The portion of employees receiving variable pay across all industries has increased since 1997, says Kay Sandvik Schmitke, manager of research at WorldAtWork (formerly American Compensation Association), Scottsdale, AZ, an association of HR professionals. Companies are "still looking at merit pay, but are emphasizing the performance bonus more," she says.

At electronics companies, which have long used variable pay for salaried employees, the trend is most prevalent among hourly workers. Among 66 electronics companies surveyed, Sandvik Schmitke found 4.6% of 2001 total hourly payroll was variable with 69.4% of hourly workers getting variable pay. Among 2,832 companies in all industries, 4.3% of 2001 total hourly payroll was variable with 69.8% of workers getting variable pay. As recently as 1997, only 52% of all hourly employees got variable pay. (She does not have a separate figure for electronics from that year.)

Moynihan agrees that more companies are offering smaller base salaries and larger incentive pay. Increasingly, he says, the metrics for achieving the incentives are spelled out before the worker is hired. LeBlanc says many companies have changed the frequency of merit reviews from 12 months to 18 months.

Merit pay and incentive bonuses have been moot topics recently at chip companies. Like most, National Semiconductor went through layoffs. It froze salaries and bonuses for 24 months, but avoided pay cuts. "Our employees are very savvy and understand what it takes to maintain profitability in a down market," says Sweeney.

National Semiconductor has a profit-based, variable pay plan for executives and engineers. In the fourth quarter of the last fiscal year, it paid out for the first time in six quarters, Sweeney says. The company was profitable in its most recent quarter, too.

During difficult times, Sweeney says, it's particularly important to educate employees about the value of their compensation. In a personalized annual report, National Semiconductor spells out each worker's total wealth, including salary, options, 401K plan and other benefits.

Sweeney says it's also important to make sure compensation is attractive in the current market-even a market of pay cuts and freezes. National decided 24 months was as long as it could freeze salaries and stay competitive. "A number of companies in our industry had freezes for the same period, but we haven't seen too many go beyond that."

Qualcomm avoided heavy layoffs and only froze pay for vice presidents and higher. It reduced merit pay for others, at first by about half and later by about one third, Sullivan says. He urges market-driven pay practices at all times, not just when things go well.

The company has the rare policy of doing merit reviews twice a year for employees below vice president. This is a better way to track the market, Sweeney argues. Managers complain about the extra work, but internal surveys show most employees like the policy, he says.

About 20% more of total pay at Qualcomm is variable now than it was five years ago, Sweeney says. Qualcomm moved to variable pay gradually because it only becomes relevant when companies are mature enough to identify quantifiable measures such as shareholder value, he adds.

National Instruments, which froze salaries for 18 months, started a variable pay plan about two years ago. One feature allows management to make immediate rewards for important accomplishments. "The sign-off is quick. When you hand them a check for $1,000 the next day, that is true recognition," Finger says.

Options and pay issues are tough, but corporate compensation planners lose more sleep over medical benefits, which are rising 15% to 30% per year. Yet, they are reluctant to shift much of the burden to employees during times of pay cuts and salary freezes.

"As a percentage, the medical variable is growing more than anything. It's terrifying," says Finger, whose health cost increases have been on the low end, thanks to a relatively young work force. He says medical benefits are growing three to four times the rate of salary increases and represent an increasing portion of total compensation.

According to Miller at Mercer medical benefits costs, as a percentage of total payroll, have increased steadily for a decade (see bar chart, above). He doesn't envision any slowdown in that trend. The rising costs of medical and other benefits (see bar chart, above) was one reason so many companies hired temporary workers during the boom times.

How else are companies dealing with these rising medical costs? "We've done some things, through plan designs, deductibles and co-pays, but we've picked up the vast majority of it," says Finger. National Instruments, which has a fitness center, also is promoting wellness. Hoping to set an example for others, Finger now wears a pedometer to track the number of steps he walks each week. "These and other programs we're going to push in 2003."

Qualcomm continues to pay the full premium for health care coverage for employees. It has increased the employee's cost for going out of network and raised their share of the cost for name-brand drugs, says Sullivan. Sweeney says National Semiconductor continues to maintain it's historic 90%-10% split in health insurance costs between the company and the employee while other chip companies have moved toward 85%-15% or 80%-20% splits.

These companies are painfully aware of what's driving increases: The rising cost of drugs and of malpractice insurance. But dealing with those issues is beyond their scope. Thus they're left to juggle rising medical insurance costs with option grants, cash compensation and incentive pay to try to come up with attractive, and affordable, pay packages.