Salomon Smith Barney, which acquired AST StockPlans last year, is the largest third-party provider, with almost 800 companies and 2.3 million option holders.  Merrill Lynch is second, with 340 clients and 1.1 million holders.  PaineWebber, E*Trade and Mellon Investor Services also are sizable players.

Complaints about outsourcing firms center on such core issues as errors in the number of options employees hold and improper calculation of prices when options are exercised.

David Wight, the stock planning compensation analyst at Telocity, Inc., a $9 million-revenue Internet access provider in Cupertino, Calif., cites “egregious errors” he saw in his prior capacity as a consultant.  Wight brought the administration of Telocity’s stock options plan back in house when he joined the company recently.

“We’ve seen problems with every one” of the companies that provide outsourcing services, says Paul Dorf, managing director of Compensation Resources, a consulting firm in Upper Saddle River, N.J.

Growing Pains

The biggest options administrators, to be sure, say they are steadily improving their services.  Coordinating myriad data feeds involving payroll and options information can be complex, they explain.  And some problems may arise if administrators aren’t sufficiently prepared for periods of peak activity, such as vesting dates.

According to Dorf, both vendors and customers are at fault.  Corporations are unrealistic about how much outsourcers can do and brokerage salespeople “quite often will sell services beyond their capabilities,” he says.

Jack Sunday, president of Group Five, says the problems are “growing pains” and should resolve over time.  Dissatisfaction is typical when companies first start to outsource services but gradually dissipates, he explains.