patron -
...Repricing options is perhaps the MOST vile, larcenous corporate compensation device ever invented. What are the point of options grants and ESOP's anyway? At best, they are intended to reward employees (at shareholder expense) for increasing value in their company. Repricing options undermines this intent, and merely robs existing shareholders (in the form of dilution), and rewards poor performance on the part of current management (since repricing is only used when the stock tanks).
Let me express an opinion that I can almost guarantee that nobody will agree with. If you look at the overall logic, re-pricing doesn't look as bad as it first appears.
The purposes of the employee option grants include at least the following :
1. Motivation/alignment of interests of the employees with the shareholders.
2. Partial replacement of cash salary costs with option grants. Note that this is essentially an employee demand and often a requirement for recruitment and a positive for retention.
3. Related to 2. above, salary costs are delayed, possibly reduced depending on stock price trajectory, and in part, are charged directly to the shareholders in dilution.
4. Positive cash flow from option exercises and the resulting tax credits. In conjunction with 3. above, this all means more available cash for all types of investments.
To judge the effects of re-pricing, consider all of the above.
1. Re-pricing has a possible negative effect on employee motivation to the extent that a reduction in stock price does not necessarily mean that an employee's options will remain worthless. This will be offset to a large degree by the fact that a policy of not re-pricing will have a negative recruitment and retention impact.
2. If the effect on cash salary costs was beneficial at a higher stock price, it will be necessary to re-price the options to recover the benefit at a lower stock price.
3. Same as above. When the original options were granted, the desire was for them to be exercised. If they are not exercised, re-pricing doesn't increase the original amount of dilution as the original options no longer exist.
4. Same as above. Re-pricing is necessary to recover the cash flow benefits.
Summary -
In almost all cases, if the benefits of the original option grants were judged to be a net benefit, so will be the net benefit of the re-priced options. After re-pricing, a fall in the stock price certainly doesn't provide any grounds for regretting the re-pricing. OTOH, a rise in the stock price produces essentially the same amount of dilution as the original grants. Although the exercise of the re-priced options will produce lower positive cash flows than if the stock price trajectory had allowed the original grants to be exercised, that isn't one of the choices.
If you don't think that option grants are a good idea at the original prices, you certainly won't like them at the lower prices.
Pretend that two identical companies exist, except that one is the other 2 years in the future with a reduced stock price and no existing history of option grants. In this case, the decision is whether to make initial option grants, identical to the decision to make the re-priced options for the other company. It seems to me that there is little real (not psychological and image) difference between deciding to re-price options and whether to grant options in the first place. A stockholder complaining about re-pricing is cutting off his nose to spite his face. It is the loss in stock price in the first place that is the basis of a legitimate complaint.
Regards, Don |
