Stock Options: Repricing Issues.

Author:Eaton, Tim V.
Position:Statistical Data Included

Stock tock options are pervasive in the business world today. Their influence in attracting and retaining employees is substantial. During market downturns, many companies are repricing their options to make them more attractive. The Financial Accounting Standards Board (FASB) has recently taken steps to deal with problems created through repricing.

The Influence of Stock Options

Stock options grant employees the right to share in the increase in value of a company's stock. Thus, the employee has the potential for greatly increased financial rewards beyond base salary. However, this reward is dependent upon the company's stock performance. Recent surveys demonstrate the increased influence and pervasiveness of stock options in the business world today.

In 1999, the global consulting firm of Watson Wyatt, conducted a study of the compensation of 1,352 companies. The study results found that the number of employees who were eligible for stock option grants increased from 12 percent in 1998 to almost 19 percent in 1999. [1] Over 75 percent of eligible employees actually received grants in 1999. Some companies have utilized a much more extensive use of options. Xerox, for example, provided options to 48,000 (over 90 percent) of its U.S. employees in 1999. [2]

Repricing Problems

As long as a company's stock continues to increase, both employees receiving stock options, as well as company shareholders, remain happy. However, market downturns can create significant problems with stock option plans. Problems are exacerbated in tight labor markets. Employees may be anxious to change companies if financial rewards are not received when ample opportunity exists to find other potentially more lucrative employment. Many companies have repriced their stock options at a lower level to provide employees additional opportunities for financial rewards. For example, during the October 1998 market downturn, more than 100 companies repriced stock option packages. [3]

Of course, the shareholders do not enjoy the same benefits created by repricing, resulting in criticism by some shareholder groups. Robert Monks, a principal in Lens, Inc., an investment firm, argues that repricing stock options provides compensation that "is not an honest market.... I win when I win and I still win when my shareholders lose." [4]

Compensation consultants, on the other hand, are not as dogmatic in their response. According to Paula Todd, principal and senior consultant on executive...

To continue reading