MBAO 6600 - Executive Compensation

Stock Options: Controversies and Issues

Repricing Stock Options - involves reducing the original stock option grant price to the current fair market value (CFMV) of the stock while maintaining the original vesting and expiration date of the option.

Why Repricing?– Employees with underwater options likely to quit.

– Increase motivation level of employees with options

– Industry practice in High Technology

MBAO 6600 - Executive Compensation

Stock Options: Controversies and Issues

Considerations for Repricing Stock Options

1. How far are the stock options “underwater?”

2. Whose options are repriced? Top executives, key employees or broad-based employees?

3. How low should the option exercise price be lowered?

4. Explore the possibility of increasing the date of new options grants as an alternative to repricing.

MBAO 6600 - Executive Compensation

Stock Options: Controversies and Issues

Critical Thinking Questions

1. What are the major arguments against repricing stock options?

2. Under what conditions would it be acceptable to reprice stock options? Justify your reasons.

MBAO 6600 - Executive Compensation

Stock Options: Controversies and Issues

Reload Stock Option Designs - a stock options enhancement that allows the employee to exercise a valuable stock option before the end of its term, using already-owned shares - mature shares held for a minimum qualifying period (ex. 6 months).

Why Reloads?– Increase executive’s stock ownership so there is a

strong ownership perspective

MBAO 6600 - Executive Compensation

Stock Options: Controversies and Issues

Considerations for Reload Stock Option Designs

1. Executive should have a vested stock option using already owned “mature” shares.

2. Avoid transactions that encourage cash exercises - the reloads should be an ownership incentive.

3. Reloads should focus on key employees and top executives.

MBAO 6600 - Executive Compensation

Stock Options: Controversies and Issues

Critical Thinking Questions

1. What are the disadvantages of using reload option designs?

2. Why is it recommended to avoid making reload options available to broad groups of employees?