Stock Options: Those Two Little Words Sent Chills of Anticipation Through the Souls Of

[HR/Leadership & Management]

Smart Business: Repricing Stock Options

Hed: Stock Option Shine Dulls

Sub Hed: Repricing, Reissuing Tricky Choices

Deck: The stock options that motivated your employees to sign on are going down the drain. Should you re-price, or think twice? Repricing is not as easy -- or as wise -- as it used to be.

Summary: Employees who once dreamed of getting rich from stock options are currently counting their losses. How do you keep them from jumping ship? Choices include repricing, reissuing, and restructuring your options package.

Pull quote: "The $64,000 question is: 'How are those charges going to impact the valuation of your company?' We advise our clients against repricing because of the significant charges on earnings." -- Christopher Loiacono, attorney and head of new media group, Richard A. Eisner & Co.

"Stock options." At the height of the dot-com boom, those two little words sent thrills of anticipation through the souls of job-hunters.

These days, with tech stocks plummeting and dot-com fever cooling, those thrills of anticipation are becoming chills of dread.

"Dot-coms brought employees in for less money, and worked them twice as hard, on the promise that options would make them rich," says Tom Thrower, president of Management Recruiters of Oakland, a California recruiting firm specializing in high-tech industries. "Now those same employees are realizing that they've been working 100-hour weeks and their stock is basically useless. The shine is off stock options."

That doesn't mean that stock options aren't still playing a role in employee and executive compensation packages, says Thrower. But it does means that now may be the time for employers to look at their options packages, and consider changes that will continue to attract, retain, and motivate quality employees.

To Re-Price or Not to Re-Price

Historically, stock market slumps have seen many employers repricing options, and lowering the strike price – the price when the shares are granted – to below the stock's market trading price in order to keep employees motivated.

Here's an example: an employee signs on with a new Internet firm and gets the option to buy 5,000 shares of stock at $2 a share after working at the firm for one year. Six months later, the firm goes public and the market price of the stock rises quickly to $6 and then $10. Then, just weeks before the employee can exercise his option by buying at $2 and being able to sell at $10, technology stocks crash and the market price plummets to $1.50 a share. At that point, the employee's options are "under water"; they are worth less than when granted. Repricing allows the employer to change the strike price on the options from $2 a share to, say, $1 thus maintaining the value of the employees' options.

That strategy isn't likely to be very popular this time around, says Corey Rosen, executive director of the National Center for Employee Ownership (NCEO), an Oakland, Calif. nonprofit organization focusing on employee ownership issues.

"Repricing of options has almost disappeared," says Rosen, "since the Financial Accounting Standards Board (FASB) rules on stock option accounting treatment changed in 1998."

In 1998, FASB ruled that employers who repriced employee stock options had to include the change as a charge to earnings as a compensation expense. A recent NCEO survey demonstrates the effects of the FASB ruling. In the three years before the ruling -- boom years for technology stocks -- 36 percent of companies with employee stock option plans repriced. Since 1998, only 7.5 percent have repriced. More than 85 percent of businesses surveyed by NCEO said they have no plans to consider repricing executive stock options in the future.

"Stock option repricing has become very complicated by the new FASB financial accounting rules," says Steven B. Lapidus, an attorney and chairman of the executive compensation and employee benefits group of Greenberg Traurig in Miami, Fla. "It raises your cash compensation expenses in your accounting and proxy statements, and you have to ask what impact that will have on institutional shareholders."

Christopher Loiacono, head of the new media group at New York accounting firm Richard A. Eisner, agrees. "The $64,000 question is: 'How are those charges going to impact the valuation of your company?'" he says. "We advise our clients against repricing because of the significant charges on earnings. This can also become a tax event for both employer and employee. You could end up with a liquidity problem because you're going to have to pay taxes on that compensation."

Other Options for Options

If repricing isn't as attractive an alternative as it was in the past, what other options are there for employers whose options are under water?

Lapidus says a few companies are taking advantage of a FASB loophole that allows options to be cancelled and then re-granted at the fair market value -- if the re-granting occurs at least six months after the cancellation date. This move can be very tricky, cautions Lapidus, because the FASB prohibits any understanding between employees and the employer about how the options will be priced when they are re-granted. The process must also be reflected in proxy and accounting statement footnotes. Telecommunications giant Sprint used this strategy last October, when it gave employees the choice of canceling their options in exchange for replacement options to be awarded this May.

"There has to be a lot of trust between the employer and employees when you do a six-month reissue," says Loiacono. "And it's not something I'd advise without legal and accounting counsel."

A safer strategy, says Rosen, is to change how and when options are issued and vested. "A year ago, we mostly saw front-loaded plans. You got most of your options when you first came to work," says Rosen. "That creates a lottery effect for option holders depending on what the price was when they came on board."

Rosen says many employers are now giving options out on a more regular basis. "Fifty-seven percent now give them out annually or semi-annually so that employees get some options at high price and some at low price. It's dollar-cost averaging as a result," he says. "If a company has that as part of an ongoing compensation plan, fluctuations in value are not as damaging."

Thrower says he is also seeing an increase in employers using different issuing schedules. "Many are taking a 30-day average and giving new employees that average as the option price, rather than just the price on the day they come on board," he says.

Options aren't going away any time soon, says Rosen. "Options are almost universal for tech companies now," says Rosen. "But it is extremely important to educate employees properly about their value. It can be tempting to make the error of focusing only on the potential upside and downplaying the risks when you talk to employees about options.

"Employers also have to remember that stock options alone aren't going to keep employees. Ownership is a wonderful thing, but if you have people who say, 'I don't like my job but I have great stock options,' chances are that's who you'll lose first when options go down."

Stock Options: Those Two Little Words Sent Chills of Anticipation Through the Souls Of

Smart Business: Repricing Stock Options

To Re-Price or Not to Re-Price

Other Options for Options

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