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Politics : Ask Michael Burke
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To: Mike M2 who wrote (83058)8/17/2000 9:37:53 AM
From: Don Lloyd  Read Replies (1) of 132070
 
Mike -

[...If options are supposed to be incentives fot performance how come they reprice the options when the stock tanks? ...]

Coincidently, I was thinking about repricing yesterday. (...ambiguous wording, yesterday is a sunk cost and doesn't need repricing -g-)

When an option is first granted by the shareholders through the agency of management, the following are the benefits received -

1. Improved employee recruitment, retention and morale for a given cash salary level.

2. Positive cash flow from option exercise proceeds.

3. Positive cash flow from tax deductions for option exercises.

All three of these benefits are nullified by a drop in stock price and the original grant is a non-event in all respects. If the original grant was justified, repricing is also justified. The eventual reward to the employees may (hopefully) be higher, but the dilution will be exactly the same as for the original grant.

Regards, Don
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