13 November 2008 - Sarah Butcher of eFinancialCareers

The insidious impact of underwater stock options

Even
if banks’ share prices were miraculously back up at the highs of early
2007, the sorry state of revenues means they would not exactly be doing
a lot of hiring at the moment. But, with stock of most large
institutions a ten year low, what little recruitment might otherwise
have taken place in the current conditions is being discouraged. This
is because with stock options underwater, no one can afford to move on.Banks’
human resources people say underwater stock options are significantly
depressing staff turnover. “If you move to another organisation and
your options are underwater, you won’t get any recompense for them,”
says the head of recruitment at one firm. “It’s definitely a factor
that people consider when deciding whether to leave.”

In
any normal market, banks would expect at least 20% of their staff to
voluntarily leave in search of a new job. In hot areas, when guaranteed
bonuses are on offer, this can rise to as high as 30%.

In
the current market, however, not only are bankers unwilling or unable
to find new jobs, many are also unwilling or unable to retire.
Plummeting stock prices and underwater options mean many of those who
might otherwise have decided to get out when things turned nasty
suddenly can’t afford to do so.

As a result, we have a market in which there are not only very new net additions to headcount, but limited replacement hiring.

Net hiring will only resume when revenues come back and former brokerage firms establish a new business model.

Replacement
hiring will only resume when bankers are willing to leave their jobs
voluntarily. If stock options are not to act as a brake on this
impulse, share prices will either have to rise to meet the option
strike price, or sink so low that there is no hope of recovery. As the
data below shows, we are nearer the second situation than the first.

Underwater options by bank*

1. Citigroup: 74% underwater. Weighted average strike price at end of December 2007, $43.08; current share price $11.21.

2. Merrill Lynch: 71% underwater. Weighted average strike price at end of December 2007, $54; current share price $15.51.

3. Morgan Stanley: 70% underwater. Weighted average strike price at the end of 2007, 48.22. Current share price $14.58

4. Credit Suisse: 47% underwater. Weighted average strike price at end of fiscal 2007, Sfr 68.1; current share price Sfr 35.92.

5. Deutsche Bank: 46% underwater. Weighted average strike price at end of fiscal 2007, €53.32; current share price €28.64.

6. UBS: 60% underwater. Weighted average strike price at end of fiscal 2007: Sfr 42; current share price: Sfr 16.77.

7. Goldman Sachs: 33% underwater. Weighted average strike price at end of December 2007, $106.63; current share price $71.21.

8. JPMorgan: 18% underwater. Weighted average grant price (based on RSUs) at end of fiscal 2007, $43.11; current share price $36.41.

*Stock prices at 12:00 GMT Nov 11.

This article was first published on www.efinancialcareers.com