Employee pay is often tied to a company’s fortune — until things turn sour, The New York Times’s Jonathan D. Glater writes.
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.
Executives at dozens of public companies, including Starbucks, Google, Intel and smaller enterprises like Composite Technology, are taking steps to lower the prices that their employees would have to pay to convert options into stock.
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.
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.
“A stock option is supposed to align the interests of employees and
shareholders by putting them in the same boat,” Patrick McGurn, special
counsel to the RiskMetrics Group, which acquired Institutional
Shareholder Services in 2007, told The Times. “Repricing of options
breaks that linkage.”
Many companies point out that it is not just the top executives who
benefit. Google is giving all its employees a chance to swap their
underwater stock options for new ones with a lower exercise price,
pointing to the stock’s nearly 60 percent decline from its 2007 high.
Some companies are going further and specifically excluding top
officials, perhaps sensitive to complaints that executive pay has
gotten out of hand. Shareholders of Starbucks voted this month to
permit a program that would allow the company’s employees to exchange
some options for fewer new options with lower exercise prices. And
Intel on Monday asked shareholders to approve an option exchange
program at its annual meeting in May. Both programs eliminated top
officials and board members.
While dozens of companies are now trying to reprice their stock
options, the numbers are not as high as they were after the technology
bubble burst earlier this decade, said Alexander Cwirko-Godycki,
research manager at Equilar.
But, he added, “I am constantly surprised at the pace with which this trend is gathering steam.”
According to Equilar, which collected data for The New York Times on
companies’ repricing activities, at least 25 companies modified option
prices in the first three months of the year, either directly or
indirectly by allowing employees to exchange options for new ones with
lower exercise prices. At least 23 have proposed modifications this
year.
The total number of programs in various stages already exceeds the
action in 2008, when 51 companies undertook repricings or exchanges.
In recent years, stock exchanges have adopted rules that generally
require shareholder approval for companies to reprice or exchange
options. But there is more variety in the repricing programs adopted by
different companies than in the past.
Like Intel, they are barring top executives and board members from
having their option prices adjusted. Others are modifying the price
adjustment based on the seniority of the employee holding the option.
By comparison, a program by ValueClick, an online
marketing company, to buy underwater options was open to all employees,
as was the repricing plan carried out by Composite Technology.
“Market conditions are such that the share prices suffered despite
the performance of management,” rather than because of it, James
Carswell, vice president for investor relations at Composite
Technology, told The Times. “It would be great if we could go back and
reprice the stock purchase price” to benefit investors, he continued.
“We don’t have the ability to do that.” Companies may have previously
asked shareholders for blanket approval to change an options program.
Google, for example, already had a plan in place that generally
permitted an exchange of employees’ options, so the company did not
give investors a say over its latest exchange. Mr. Carswell of
Composite Technology said the company already had similar approval.
A few companies have run into serious shareholder resistance.
Managers of Arrowhead Research, a nanotechnology company based in
Pasadena, Calif., did this month after seeking to lower option exercise
prices.
“Shareholder feedback to the proposals, however, made it clear that
there is significant concern over the repricing structure proposed,”
Christopher Anzalone, the company’s chief executive, wrote in a letter
to shareholders. “It is critical to us that our shareholders have
confidence that our interests are aligned, so we are withdrawing the
proposals.”
Granting options is not likely to become less popular, though.
Companies’ low stock prices are encouraging other companies to grant
new options, said Jonathan Ocker, chairman of the compensation and
benefits group at Orrick, Herrington & Sutcliffe in San Francisco.
“I’m seeing more and more companies considering granting options
now, because there’s no place to go but up,” Mr. Ocker told The Times.
He paused, then added, “It’s either going to go up or we’re in real
trouble.”
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