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Looming Wave of Option Repricing?

by: Paul Kedrosky August 29, 2008 | about stocks: FNM / FRE / VMW / WM    
Paul Kedrosky

Paul Kedrosky

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Employee stock options at 1 in 10 Fortune 500 companies are essentially worthless, and stock options are currently underwater at 40% of such companies. That is up from a little over 30% being underwater at the end of Q1, according to a new study.

Some more specifics:

  • Five of the ten most underwater companies are in financial services
  • Freddie Mac (FRE) has the most deeply underwater options, with 90% below its weighted average share price of August 15th. Fannie Mae (FNM) and WaMu (WM) aren’t far behind.
  • VMware (VMW) is already trying to get shareholder approval to reprice employee options.

Is a wave of option repricing looming? You have to imagine it’s up there as an issue, but a weak employment market is likely taking some of the pressure off job-hopping option-seekers.

[via FinancialWeek]

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This article has 15 comments:

  •  
    Aug 29 05:29 PM
    I am confused, the employees failed to deliever, so why reprice the options. Let them expire. It is time management took a hit for some of the excess they are responsible for. If you cannot retain them than let them move on.
    Reply
  •  
    Aug 29 06:39 PM
    I agree, farmer.
    Reply
  •  
    Aug 30 09:04 AM
    a"greed"
    Reply
  •  
    Aug 30 09:26 AM
    as long as this nonsense continues this system will continue to fail. there has to be accountability in business,gov. & military.this whitewashing of poor management is a disgrace.
    Reply
  •  
    Aug 30 10:11 AM
    Slaughtered shareholders are stupid enough to approve options repricing?
    Reply
  •  
    Aug 30 10:36 AM
    Normally, periods of up to a decade of employee options being under water (as distinguished from management stock options, which are treated in an ENTIRELY different manner by management) are not unusual, and the thing that spurs them to be upgraded is an undesirable level of turnover.

    As already noted, employee turnover is not much a factor this time around, as employees are more concerned with hanging onto a job than worrying about the lack of performance in the company's stock.

    However, if companies are faced with significant employee unrest, repricing employee stock options is cheaper for the company than giving raises or bonuses, and that might occur -- but not while the business outlook remains asa uncertain as it is.

    The "looming wave" of options repricing will probably serve as an early indicator of improvement in the business cycle, signaling an exit to the recession. If followed up in six months or so by a wave of compensation increases, you can be sure that better days lie ahead.
    Reply
  •  
    Aug 30 11:50 AM
    there are plenty of jobless.the employee will stay now even if you do nothing to their options.its the self serving boards & ceo's who could not care less about the stockholder(suckerhold... that concern me.they should all just be paid by dividends. no pay or options. that would shake things up.
    Reply
  •  
    Aug 30 12:06 PM
    Option re-pricing is PROOF that options are NOT incentive but plain salary disguised as incentive plans. If people want to leave because the options are underwater, let them leave. Good riddance. One of the worst things management can do is to treat people as indispensable. None of us are.

    I vote no in the proxy. The level of options abuse is scandalous.
    Reply
  •  
    Aug 30 12:48 PM
    proxy voting is a joke.the ceo's & bod's always have the numbers on their side.this business is not a democracy its a scam.if you are not happy with the corp. all you can do is sell.lokk at all the toppeople that have ruined corps.& still walked away with millions.someone smarter than me(most) with access to the info ought to make a list of all the ceo's that ruined businesses & how much they got paid to leave.i remember 1-chainsaw al dunlop(i think) who killed sunbeam & devastaded,who knows,how many families.there must be hundreds.
    Reply
  •  
    Aug 30 04:31 PM
    let them go... The stock holders seem to pay for this poor management
    Reply
  •  
    Aug 30 05:43 PM
    The title of this post is misleading. Should mention employee in the title.
    Reply
  •  
    Aug 30 09:08 PM
    Captainccs: "Option re-pricing is PROOF that options are NOT incentive but plain salary"

    No, Its proof of something worse: Its proof that the early recipients didn't perform.

    So why reprice? Any company has to have some incentive plan in place that's going to really incentivize. If options didn't work once they should try something else, or ... better yet...someone else.
    Reply
  •  
    Aug 31 04:45 AM
    I always vote no on option plans. I do not approve of options at all.

    All of the firms I have invested in pay executives more than they are worth.

    I agree with farmer.
    Reply
  •  
    Aug 31 06:30 PM
    I'm surprised you didn't mention LEH. The company is 30% employee owned and the options have lost 80% of their value. They are looking at revaluing executive options because they have all lost most of their net worth. I think management should get paid for the job they have done, so if the stock drops to zero, that's exactly what their contribution is worth.

    Reply
  •  
    Sep 01 09:18 AM
    most of the companies pay huge salaries and bonuses to their top managers at the expense of the shareholders and i think it is about time to eliminate the option bonuses and reduce their salaries.why re-price their options? if the managers did a good job their companies shares would be higher.why reward poor companies managers for a poor job? i sugest they fire those managers and cancell their stock options too......not re-pricing
    just my 2 cents


    On Aug 30 09:08 PM Kinabalu wrote:

    > Captainccs: "Option re-pricing is PROOF that options are NOT incentive
    > but plain salary"
    >
    > No, Its proof of something worse: Its proof that the early recipients
    > didn't perform.
    >
    > So why reprice? Any company has to have some incentive plan in place
    > that's going to really incentivize. If options didn't work once they
    > should try something else, or ... better yet...someone else.
    Reply
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