Companies breathe life into options - 7 Dec 2008
Companies breathe life into options
Governance specialists sound alarm over exchange programs
By Sara Hansard
December 7, 2008, 6:01 AM EST
When the going gets tough, the tough still find a way to make their bonuses.
With the stock market in Palookaville, more companies are quietly
bailing out executives holding "underwater" stock options. The moves
are aimed at keeping executives motivated and their pay packages from
being dinged.
Maxim Integrated Products Inc., a technology
company in Sunnyvale, Calif., for example, recently filed plans with
regulators to exchange employees' underwater stock options for cash.
Meanwhile, casino operator MGM Mirage of Las Vegas recently exchanged
underwater options for restricted stock, and United Therapeutics Corp.
of Silver Spring, Md., re-priced underwater options for a more
favorable price for its executive officers.
Patrick McGurn: Option re-pricing ranks high among compensation issues.
"The big comp issue for this proxy season is not say on
pay; it's R&R — re-pricings and re-setting the bar," said Patrick
McGurn, special counsel at New York shareholder advisory firm
RiskMetrics Group. "Those are the twin plagues of an economic
downturn."
Executives
at scores of companies are holding stock options — which give them the
right to buy shares at a preset price — that are essentially worthless.
The problem with underwater stock options is that they provide little
in the way of incentive for executives to meet performance goals or
even to stay with the company.
CREATIVE RE-PRICING
To change that, many companies are replacing those options with new
ones at a lower exercise price or with restricted stock, or simply
exchanging them for cash...
entire article - http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20081207/REG/312089965
...A survey of more than 450 companies released in November by Towers
Perrin found that companies are focused on targeted work force
reductions and spending cuts rather than on massive layoffs. That has
led to an emphasis on retaining key talent, the survey said.
"Stock
option re-pricing in particular is an area where you may be able to
take a stock option that you're going to have to charge an expense for
— and one the participant may view as worthless — and turn it into
something that the participant perceives value from," Ms. Todd said.
Indeed,
accounting rules require companies to recognize options expenses based
on the original value of the stock when the option was issued, whether
or not it is exercised.
Companies may be able to issue fewer
new options to employees in exchange for underwater options, Ms. Todd
said. "Those options motivate people more" if they are still in the
money, she suggested.
"I understand investors are saying, 'The
stock price is down. Nobody is bailing me out. Nobody is restructuring
my investing,'" Ms. Todd said. "But the point is, we are where we are.
You're stuck with the expense whether you get value out of it or not."
E-mail Sara Hansard at shansard@investmentnews.com.
Underwater stock options are taking their toll on company morale right now and companies are exploring a variety of alternatives none of which include the simplest solution of all: education. Although underwater options don't have "in-the-money" value they still may have significant "time value" and "leverage" based on grant price, years to expiration and the volatility of the stock. However, employees don't know this about their options and what they don't know can hurt the company because option exchange programs are far more expensive than option education programs. To see an example of an option education program that focuses on teaching employees about Time Value, Leverage and how to make timely decisions visit: www.stockopter.com.