Heads They Win, Tails They Win a Bit Less - 27 Mar 2009

The Audit


— March 27, 2009 02:26 PM

NYT: Heads They Win, Tails They Win a Bit Less

http://www.cjr.org/the_audit/nyt_heads_they_win_tails_they.php

By Ryan Chittum

The Times looks at a piece
of the unaccountability culture in corporate America: Changing
stock-option strike prices (legally) to make them less underwater.

The lede:

Employee pay is often tied to a company’s fortune — until things turn sour.

The Times’s lead example is a company that dropped its strike price by 69 percent to within shouting range of its current price:

Composite Technology, which makes electric cables and other
products, decided in January to lower the price at which its workers
could use their stock options to buy shares in the company. The
managers and directors slashed the price on all of the company’s 23.4
million options to 35 cents.

The move still leaves the company’s chief executive, Benton H.
Wilcoxon, and others holding options that are underwater — meaning the
price of exercising the options is above the current market price. But
now Mr. Wilcoxon will be able to book a profit if the stock price
increases by less than half, rather than quadrupling.

The repricing could be of particular benefit to Mr. Wilcoxon, who
has a whopping 4.2 million options, previously priced at $1.13. The
company lost $53 million in its latest fiscal year, and its stock fell
to 27 cents on Thursday from as high as $1.36 last July.

Nothing like rewarding failure.

What’s interesting is that the NYT says some companies like
Starbucks and Intel are specifically excluding executives from these
plans. I would have liked to have had that quantified somehow—or at
least estimated. I think executives self-dealing by changing their
option prices is quite a different story than just changing it for
employees.

That doesn’t mean changing them for employees is necessarily right, though. Just that it’s less icky.

As the Times points out:

The moves are usually described as important for retaining
employees, especially as stock options that vest over several years
look utterly worthless in the current market. With prices plunging
across a variety of industries, companies also often assert that stock
price movements are not really a reflection of employee performance.

It’s especially important for a CEO like Wilcoxon to retain himself.

But the point of options is that they’re options (obviously). Stock
goes up, you win. Stock goes down, you don’t—but you don’t lose. At
least for the sake of optics, new options would seem better.

Because changing prices is just unfair to shareholders:

But the moves leave shareholder advocates fuming. Owners of
company stock reap no monetary benefit from repricing of options,
advocates say — only employees do. The process, in their view, is
fundamentally unfair. Modifying the options means employees gain from
stock price increases, while investors feel the brunt of stock price
declines.