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No Lifeline for Underwater Options

Repricing proposals for underwater options likely will receive a chilly response from shareholders.

Alix Stuart, CFO Magazine
January 1, 2009

What to do about underwater stock options

Companies could ignore their underwater stock options, as any approach other than due nothing requires extensive analysis and costs (even due nothing may be decision after diving into whether to do anything). However, issues related to employee retention and motivation, along with current accounting rules, make it reasonable that companies are considering what to about deeply underwater options caused by forces beyond their control. Most companies that are moving ahead with exchanges/repricing are at least resetting the vesting of any new stock option or restricted stock grants and excluding senior executives and board members. Compared to the last big wave of repricing (term now includes option exchanges) after the tech bubble burst, there are many more controls, disclosures, and procedures that must be followed. If companies did not have to keep expensing on their financial statements the underwater options that are never exercised, they might not be as eager to look at taking action. The current accounting rules, while complex, also make it less costly to modify (cancel and reissue grants) and save some of the tax benefits to the company from the grant. Plus almost all of these option exchanges need shareholder approval (often negotiations on structure with major institutional shareholders and their advisors) and extensive SEC disclosure. Issues of concern with them concern more the structure (e.g., what ratio, who is excluded, and is it true value-for-value exchange) and timing of the exchange, what is done with the cancelled options (e.g., are they returned to share pool for regranting, will it reduce overhang and dilution?), and whether the company is rethinking its approach to stock compensation. Bruce Brumberg, Editor P.S. for more on this topic, look in site section under Basics: Underwater Stock Options.

Posted by Bruce Brumberg | January 02, 2009 10:10 am

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