In the News

Controversial repricings of stock options on the rise

Sunday, October 13, 2002
by Gary Strauss


Stock-option repricings are surging as companies replace worthless holdings with lower-priced options, providing employees a better chance to cash in if share prices rebound.

Companies considering repricing are "dramatically on the increase," says Lance Kimmel, a corporate adviser at law firm Foley & Lardner. "Boosting employee morale is greater than any hit they may take to the bottom line or from shareholders."

Shareholders and corporate governance advocates disdain repricings - particularly for executives and directors - because they offer fresh potential rewards to those who have overseen sharp drops in their firm's stock price. Other long-suffering shareholders get no such benefit. That's a prime reason some companies prohibit repricings while others also reprice options held by less-senior employees.

Companies argue that options have to be repriced because for many, they remain the cheapest way to attract and reward employees. The widespread use of options in the 1990s bull market enriched scores of executives and rank-and-file workers. For example, an executive at a dot-com company granted options at $5 might have cashed them when the stock hit $70, a pretax profit of $65.

Yet with most stocks trading far below the exercise price, prospects for big paydays have faded, creating a repricing "boomlet," says Pat McGurn of proxy adviser Institutional Shareholder Services. Looming regulatory changes, such as requiring companies to first seek shareholder approval, are also prompting the repricing rush, says Marc J. Lane, a securities lawyer and Northwestern University professor. More than 30 companies announced repricings through midyear. An additional 50 have since announced repricings. More are expected by year's end.

The Investor Responsibility Research Center found about 50% of recent option repricings allow senior executives to participate; 25% allow directors. Yet some, such as disposable-camera-maker Concord Camera, even repriced those of outside consultants.

Most companies repricing are in technology and telecom, such as WorldCom and BMC Software, which say they need to issue fresh options to motivate and retain key employees.

But for many in those sectors, that's no longer true. "When competition was intense, companies could make that argument," says Carol Bowie, IRRC governance director. "I don't know about that now."

While tech firms reprice the most, recent repricings also include Coeur d'Alene Mines, garden-tool-maker Acorn Products and marketer Weider Nutrition.

Not that repricings always work. Software provider Inktomi canceled 3.2 million options held by CEO David Peterschmidt and other executives last year that were priced at up to $116.75. The options were reissued at $4.21, but Inktomi stock closed Friday at 31 cents.

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