Underwater stock options drive top executives turnover

When the market price of
company stock falls below the exercise price, the options are
considered to be "out of the money" or underwater. Many publicly traded
firms have become concerned about retaining highly valued executives
who hold underwater stock options, fearing that they will voluntarily
leave the firm for a better position elsewhere. A new study in Personnel Psychology
reveals that voluntary top executive turnover was more likely to occur
as executives' stock option portfolios fell further out of the money.
Benjamin Dunford, Ph.D., Derek Oler, Ph.D., and John Boudreau, Ph.D.,
examined a large sample of executives in publicly traded U.S. firms
between 1996 and 2006.

Results show that not only were underwater options associated with
voluntary executive turnover, but moreover, CEO turnover was
significantly more sensitive to out of the money stock options than
non-CEO turnover.

The study also found that the odds of voluntary executive turnover
may be reduced substantially by increasing the value of out of the
money stock option portfolios, even if they don't move the portfolio
back in the money.

"Our findings suggest that firms should consider changes to their
current retention policies and practices for valued top executives,"
the authors note. "Firms may not be doing enough to retain valued but
underwater executives if they are relying solely on base pay, bonus
pay, and restricted stock increases."