March 13, 2001, 11:29 AM —
By Michael Schroeder and Ruth Simon
Staff Reporters of The Wall Street Journal
No gain, no pain.
That seems to sum up corporate America's view of employee stock options. Some technology companies, facing pinched profits and sinking stock prices, are bailing out workers stuck with worthless stock options by quietly chucking the old options, then resetting the exercise price lower to make the options valuable again.
It's a neat gambit, and it's not new. But now, securities regulators are set to take a hard line on the practice -- and that has got some technology firms up in arms. At issue is a potential plan by the Securities and Exchange Commission that would impose new, stricter filing requirements for companies that revise, or "reprice," employee stock options.
The upshot: The SEC plan would require lengthy disclosure before companies reprice options. Currently, options repricing is disclosed in proxy material that often appears months after such options are granted. The SEC's new approach "is like trying to fit a square peg in a round hole," gripes Thad Malik, general counsel of Lante Corp. of Chicago.
It is the latest skirmish in the battle over efforts by companies to take the downside risk out of stock options. The SEC also recently advised accountants that companies must disclose the financial impact of special agreements that allow workers to rescind soured employee-stock purchases. Option repricings have triggered criticism among some investors, who contend that they reward managers who haven't performed. The repricing ruckus underscores how far companies have gone to provide financial incentives in a bid to retain key executives.
Employee stock options are important to an increasing number of U.S. workers. They are the most widely used form of incentive pay, giving employees the right to buy their company stock at a set price within a number of years. At the peak of the technology bubble last year, options made many workers millionaires on paper. Now, many of those options are "underwater"; that is, the underlying stocks trade at a price lower than the "exercise" price at which the options can be cashed in.
Roughly three-quarters of companies with underwater options have taken or are considering steps to compensate employees for their paper losses, according to a survey by iQuantic Inc., a compensation-consulting firm in San Francisco. Nearly 70% of the businesses considering action are looking at repricing or canceling and reissuing stock, the survey found.