Underwater Stock Options Get a Lifeline From Firms - 7 Mar 2009

Underwater Stock Options Get a Lifeline From Firms

By Tomoeh Murakami Tse
Washington Post Staff Writer
Saturday, March 7, 2009; Page D01

Nearly 100 companies have undertaken programs that allow employees, many of them executives, to exchange sharply depreciated stock options for new awards with more generous terms.

The companies, from Google to Silver Spring-based United Therapeutics, argue that the exchange -- which increases the chances that executives will be able to collect rewards even though the company stock has plummeted -- is necessary to retain and motivate personnel.

Critics say the practice undermines the purpose of performance-based bonuses and puts the company's executives and workers on a different plane from ordinary shareholders who have no choice but to hold on to battered stocks or sell them at a loss.

"It goes to a sense of entitlement, which I think is misplaced," said Con Hitchcock, a lawyer who advises activist investors on corporate governance. "There are a lot of people other than executives who could use good-performing stock in their portfolio."

Stock options can account for a significant portion of pay for some employees, especially executives. They give the holder the right to buy stock at a future date for a specified price. For example, 100,000 vested stock options with a "strike price" of $30 would translate to a $2 million profit if the company's stock is trading at $50. The strike price is typically the price of the stock on the day the options are awarded.

The collapse of the stock market has dimmed prospects for cashing in existing options. Since the beginning of last year, at least 96 companies have implemented or proposed option repricing or exchange programs, according to Equilar, a compensation research firm.

more...http://www.washingtonpost.com/wp-dyn/content/article/2009/03/06/AR2009030603384.html