01/12/ · In considering how to deal with underwater stock options, companies need to consider their own business needs, employee morale, plan reserves, burn rates, stock price history, shareholder base, and proxy advisory firm recommendations. One size does not fit all. Some companies may be in a position to supplement underwater options with new blogger.comted Reading Time: 11 mins Unfortunately, no one solution will work for all employers. Nevertheless, there are three main choices for employers whose stock options are underwater. Specifically, a Radford Surveys + Consulting/Aon study released on 9/22/ reports that, out of 61 companies that have disclosed exchange programs for underwater stock options (“Exchange Programs”) since , the methods employed generally Underwater stock options have an exercise price which is greater than the market price of the underlying stock. For example, you may have options with an exercise price of $10 a share while the stock is trading at $8 a share. For obvious reasons, you do not want to exercise underwater stock options, as you would being paying more for the shares
Are Your Options Underwater? - Wendel Rosen LLP
July 3, Stock Stock options underwaterStock Market. Jon has a passion for equity compensation with over 20 years of experience guiding companies from initial idea to full execution of plans. Jon has a Bachelor of Science in Mathematics and Economics from the University of Washington, is a Fellow of the Society of Actuaries, and is a certified equity professional. He is based in San Francisco. Infinite Equity is a trusted Global Shares partner.
Consequently, many of the employee stock options granted by companies over the past few years are now underwater. To address these problems, stock options underwater, some companies will likely explore re-pricing the options or an exchange program whereby employees can trade-in underwater options for at-the-money options, stock options underwater, restricted stock, or cash.
There has been no shortage of publications recently about addressing underwater stock options. In this article, we take a step back from these generic summaries to provide perspective on what is important in assessing whether to consider a re-pricing or exchange program.
To better understand whether a re-pricing or an option exchange program is the right response for your company, stock options underwater is informative to look at the history of these actions over the past couple of decades.
Options have been re-priced for nearly as long as they have been issued, but the first wave of employee stock option exchanges came following the burst of the dot-com bubble in the early s, stock options underwater. In the aftermath of all these changes, new accounting rules for equity compensation were finally adopted.
Shareholders won the right to vote on equity proposal matters, and the stock option backdating scandal was exposed. At this point, stock options underwater, there was less shareholder scrutiny of re-pricing and fewer rules surrounding the accounting for employee equity.
Most notably, companies did not have to accrue compensation expense for employee stock options. Consequently, companies simply cancelled the underwater options with no adverse accounting implications and granted new, at-the-money options to employees six months and a day later to avoid mark-to-market accounting. Fewer regulations meant companies could react quickly to address any retention or overhang concerns, at the expense of accountability to shareholders, stock options underwater.
The second wave of programs emerged following the housing bubble burst, which triggered a global financial crisis now known as the Great Recession when stock prices again fell precipitously. In the aftermath, Dodd Frank ushered in a new era of executive compensation governance. Performance awards emerged as part of the long-term compensation for executives, and migration began, from stock options to RSUs as the favoured vehicle for broad-based equity programs.
At this point, stock options underwater, FASR had been implemented, requiring companies to estimate the fair value of employee stock options at the grant date and to accrue compensation expense stock options underwater on that grant date fair value regardless of the value recognized by the employee.
Additionally, shareholder approval was now required for most companies to modify or exchange underwater options. Proxy advisory firms laid out stringent option exchange requirements that needed to be met to receive a favourable recommendation.
An era of more balanced, shareholder-friendly option exchange programs emerged, stock options underwater, with the majority designed to receive proxy advisor support.
Following the financial catastrophe fueled by corporate greed and loose regulations, shareholder concerns regarding addressing underwater options were not unfounded or unjustified. Proxy advisory firms and large institutional investors provided specific criteria for companies to receive support for an option exchange program. While there was some variation between them, programs generally needed to comply with the following 6 criteria:.
Some companies that completed an options exchange program following the Great Recession received shareholder approval without following all these guidelines.
However, it is fair to say that all were influenced by these considerations in some manner and that shareholders possessed a stronger voice and healthy scepticism towards addressing underwater options, stock options underwater. After the deluge of exchanges in the wake of the Great Recession, options exchanges were relatively few and far between for several reasons. First, broad-based option programs fell out of favour, stock options underwater, with many companies shifting towards RSUs, stock options underwater.
Secondly, a ten-year bull market meant that most companies saw their share prices rise and their employee options sit comfortably in the money.
However, broad-based options remained popular in the start-up tech and life sciences industries, in which share prices can be subject to extreme volatility due to product or drug successes or failures. In general, options exchanges in this period hewed towards the proxy advisor guidelines. However, strict adherence to their exchange related guidelines may not be optimal for many companies, and, in some cases, their shareholders.
One primary concern surrounding option exchanges has always been the discomfort with one stakeholder employees benefiting by having the value of their equity holdings restructured while another stakeholder investors does not. On the surface, this may seem unfair, but there are key distinctions between these two groups of stakeholders. When considering the items above, it becomes clear that an equity re-pricing or exchange can be an effective way to achieve an array of objectives with limited accounting charges, cash expenditure, stock options underwater, and, in some situations, less dilution to shareholders.
The facts and circumstances that surround potential option exchanges today are fundamentally different from those that surrounded exchanges in the wake of the Dot-Com Bubble and Great Recession. As such, it is important for each company to evaluate a potential exchange in the current environment. Here are a few questions, along with what you need to consider, and the implications, stock options underwater.
Implications: If the stock price drop is due solely to COVID, it may be prudent to include executives in an exchange program. Considerations : Some companies may expect to bounce back in the next few months as the stock options underwater and the world reopens. The share price of other companies may take longer to reach pre-pandemic levels or may never fully recover, stock options underwater.
Implications: The expectation and timing of recovery may inform the decision stock options underwater what type of equity award to grant in an exchange.
Considerations: The main objectives can range widely, from recapturing dead equity overhang back into the shared pool to increasing retention to restructuring the value function of employee equity e, stock options underwater. Implications: The objectives will help the company decide whether to conduct an exchange and how to design it. Considerations: Option exchanges require significant effort stock options underwater several departments and are not inexpensive to conduct.
Implications: Plan for three to six months to thoughtfully design and implement. If a company decides that an options exchange program is stock options underwater best path forward, it should be empowered to design a program that successfully achieves its goals.
Ultimately, a thoughtful and creative exchange program will be more beneficial to shareholders than strict adherence to proxy advisor requirements. The proxy advisor guidelines for option eligibility are to exclude options granted last year or with a strike price within the week high, stock options underwater. It may be important to include options granted recently if COVID has fundamentally altered the long-term prospects of the business.
Exchanges are a one-time restructuring of overhang and it may be pragmatic to cast the widest net possible. The proxy advisor guidelines for employee eligibility are to exclude the Board of Stock options underwater and Executive Officers. Consider including Executives if stock price decline is not a reflection of poor stewardship and if stock options underwater among leadership is important, stock options underwater.
Any new awards granted could contain performance conditions to further align leadership with shareholders, stock options underwater. The proxy advisor guidelines for exchange ratios are: value-neutral. If granting RSUs, post-exchange awards could have less value than exchanged awards to counteract the guaranteed nature of an RSU vehicle. The proxy advisor guidelines for vesting periods are: no awards vested upon exchange. Combine longer vesting periods with post-vest holding periods to further align employees with shareholders.
These conditions stock options underwater be based on new strategic objectives, traditional financial goals, stock options underwater, or stock price performance on an absolute basis or relative to peers. By adding performance conditions, the company recognizes this concern and guarantees that executives only receive value if they deliver tangible results that help create wealth for shareholders.
It is worth noting that performance awards were not widespread when the proxy advisory guidelines were established, and these guidelines may be due for revision in an equity landscape in which performance awards are widely accepted and promoted. Post-vest holding periods are simplest to apply to RSUs and are most logical to apply to executive awards since these high stock options underwater often have less need to liquidate value in the short term.
By creating a longer period between the exchange and the time stock options underwater award holder can realize value, post-vest holding periods ensure that employees are thinking about long-term company health and long-term value stock options underwater for shareholders.
Companies will ultimately need to design an option exchange program that receives shareholder support. However, stock options underwater, that does not necessarily mean complying with any or all of the guidelines laid out by proxy advisory firms. The option exchange design process should be both thoughtful and deliberate, and companies should also remember there is flexibility to design a program suited towards its individual goals, stock options underwater, as long as it can make the case to shareholders for why the program is the most effective way to achieve those goals.
Since the turn of the century, option exchange programs have evolved to fit changing circumstances and regulations. However, option exchange programs have looked fairly similar over the last fifteen years, mainly due to proxy advisor guidelines and the impact of the Great Recession on corporate governance and shareholder oversight.
The Stock options underwater pandemic has led to an increase in the number of companies considering option exchange stock options underwater. These companies should feel empowered to tailor the design of an exchange program to achieve objectives while keeping the best interests of shareholders front and centre, stock options underwater.
Infinite Equity is a trusted Global Shares partner and expert in the establishment of employee stock plans for US companies of all sizes. Private Companies Public Companies Academy. This Academy post is by Jon W. Burg, CEP, FSA - Infinite Equity Jon has a passion for equity compensation with over 20 years of experience guiding companies from initial idea to full execution of plans.
A Brief History of Stock Option Re-pricings and Exchanges To better understand whether a re-pricing or an option exchange program is the right response for your company, it is informative to look at the history of these actions over the past couple of decades. Straight re-pricing of options i. The re-priced options were granted 6 months and a day after the underwater options cancelled to avoid recording any expense.
Accounting rules were governed by APB 25 FAS R adopted inwhich did not require expensing of stock options at grant but modifying them would trigger variable accounting. Conducted without shareholder approval as the exchanges NYSE and NASDAQ did not enact rules bestowing the right to vote on equity compensation matters until The Great Recession During the Great Recession, equity and the market underwent further changes: The stock market impact was widespread, affecting all industries and companies.
Exchanges required a month-long tender offer period in which employees could make an election. Accounting rules were governed by FAS R now ASC Topicwhich required expensing of options. Option repricing and exchange programs were treated as a modification of the original award, which was an improvement over the APB rules. Both the NYSE and NASDAQ required shareholder approval for most underwater option programs unless the plan explicitly stock options underwater it was not required.
Vote recommendation from proxy advisors increased in importance, resulting in more shareholder-friendly design elements, stock options underwater. Proxy Advisor Lens and the Period After Following the financial catastrophe fueled by corporate greed and loose regulations, shareholder concerns regarding addressing underwater options were not unfounded or unjustified.
While there was some variation between them, programs generally needed to comply with the following 6 criteria: Provide a clear company-specific rationale Exclude the Board of Directors and Executive Officers Exclude any options recently granted or with a strike price below the week high Exchange options on a value-for-value basis Include vesting for new awards Contractual period for new awards not longer than average for exchanged options Some companies that completed an options exchange program following the Great Recession received shareholder approval without following all these guidelines.
They are Employees, not Investors One primary concern surrounding option exchanges has always been the discomfort with one stakeholder employees benefiting by having the value of their equity holdings restructured while another stakeholder investors does not. Employees receive equity as compensation for services provided: The value of equity compensation ultimately recognized by the employee is intended to vary with the share price, but too large of a disconnect between the target value and the realizable value can be demotivating.
Employee equity awards have retentive value: The last thing a company with a struggling share price needs is an exodus of key talent and individual contributors. Restoring the retentive aspects of underwater employee equity even executive leadership can absolutely be in the best interests of shareholders when measured against losing talent and the cost of hiring and training.
Companies ultimately do something: To address concerns that occur when the share price drops significantly, companies inevitably take some action even when a re-pricing or exchange is ruled out. This commonly takes the form of retention grants, key performer awards, or a variety of other creative incentives that add to the total issued overhang.
Equity can be optimal over cash: Equity does stock options underwater the value of future earnings, but it also preserves cash at times that may be critical to a company. The cash can be preserved to service debt, stock options underwater, pay obligations, or otherwise avoid seeking funding at a greater cost of equity. Key Questions to Ask When Considering an Option Exchange Today: The facts and circumstances that surround potential option exchanges stock options underwater are fundamentally different from those that surrounded exchanges in the wake of the Dot-Com Bubble stock options underwater Great Recession.
Options Trading for Beginners (The ULTIMATE In-Depth Guide)
, time: 2:53:42When Your Stock Options Are Underwater | The Motley Fool
Unfortunately, no one solution will work for all employers. Nevertheless, there are three main choices for employers whose stock options are underwater. Specifically, a Radford Surveys + Consulting/Aon study released on 9/22/ reports that, out of 61 companies that have disclosed exchange programs for underwater stock options (“Exchange Programs”) since , the methods employed generally 01/12/ · In considering how to deal with underwater stock options, companies need to consider their own business needs, employee morale, plan reserves, burn rates, stock price history, shareholder base, and proxy advisory firm recommendations. One size does not fit all. Some companies may be in a position to supplement underwater options with new blogger.comted Reading Time: 11 mins Consequently, many of the employee stock options granted by companies over the past few years are now underwater. To address these problems, some companies will likely explore re-pricing the options or an exchange program whereby employees can trade-in underwater options for at-the-money options, restricted stock, or cash
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