Firms Jump to Salvage 'Underwater' Stock Options

By PHRED DVORAK

More companies are executing their own bailouts -- for holders of worthless stock options.

Thirty-five companies, including MGM Mirage and Toll Brothers
Inc., have swapped options that are "underwater" -- meaning they can be
exercised only at prices above today's levels -- for other securities
or cash this year. That's roughly twice as many as in each of the past
three years, according to compensation trackers Equilar Inc. and
Radford Surveys & Consulting.

Twelve other companies lowered, or are planning to lower, the
exercise price of some options. And 15 others are proposing to exchange
underwater options for cash or stock. Many more exchanges are coming
next year, experts say.

"We're going to see them go through the roof," says Brett Harsen, a
Radford Surveys vice president. He has advised 44 companies on
option-exchange deals this year, compared with about three a year for
the past few years.

Companies issue stock options, which give holders the right to buy
stock at a set exercise price, as an incentive for employees. Big
option grants can swell the compensation of top brass, but
nonexecutives typically hold most of a company's options.

Companies say they're considering the swaps to bolster employee
morale because so many options are now worthless. Equilar estimates
that at 72% of Fortune 500 companies, the typical option is underwater.
Some 93% of options held by Fortune 500 CEOs have no value at current
prices, it says.

Option exchanges can rankle shareholders,

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