Is Option Repricing Making a Comeback?

Asking shareholders to OK repricing plans is a trend that is something more than a trickle, if not yet a wave.

As annual meeting time rolls around, more shareholders are finding companies asking them to approve proposals to reprice or exchange stock options that have slipped underwater.

While repricings were popular in the years following the Internet bubble burst, shareholders more recently have had great antipathy for them. Patrick McGovern, special counsel to the proxy advisor RiskMetrics Group, says the debate over whether to reprice is going to be a hot issue facing many compensation committees.

“Option repricing seems to be a hot trend right now, but a limited trend,” he says. “It’s top-of-mind in tech, biotech, retail, and some other troubled sectors, but not in the broad economy.”

That leaves most executives holding worthless options. According to the executive compensation research firm Equilar, as of mid-February 71.6 percent of Fortune 500 companies had outstanding options with an average exercise price above their market price. Since the first quarter of 2008, 35 companies have repriced options. Among those, 12 repricing programs were applied to option holders broadly, and 23 were for only a select few employees.

Option exchange programs, in which companies modify more than just the stock option strike price, have also become more prevalent over the past five quarters, according to Equilar. In the first quarter of 2008, six companies completed such programs. In this year’s first quarter, 19 companies have done so, and 11 others have proposed exchanges. The most common type of exchange are canceled and replaced with new options carrying a lower strike price as a new vesting period or term length.

Google and Starbucks both announced option-resetting programs in late January. Google is allowing employees to exchange underwater options for the same number of new options at market value, which can be redeemed after a one-year vesting period. The move is largely seen as a bid to incentivize Google’s precious employee base to stick with the company. At Starbucks, on the other hand, employees will trade existing options for a smaller number of options at a new strike price.

“The old-school, non-shareholder-approved, one-for-one exchange that Google is doing versus Starbucks’ new-age, shareholder-approved, value-for-value exchange is a great juxtaposition right now,” says McGurn. The coffee company’s vote the tone of discussion about the issue at the Google meeting “will provide an early-season idea on how shareholders are reacting to these issues.”

More recently, media company Scripps Networks asked its shareholders for permission to replace underwater stock options with restricted stock that could be sold in two waves; the first half after a year and the rest after two years, according to the company’s proxy statement.

Atlanta-based SunTrust Bank is taking a different route to deal with underwater stocks by granting executives new options at a lower price. They will continue to hold their existing underwater options.

In its annual proxy statement, filed with the Securities and Exchange Commission Tuesday, SunTrust asked shareholders to approve a new stock plan that would Grant CEO James Wells 852,941 options with a strike price of $9.06. His lowest current strike price is $50.50, and the company’s stock is trading at just over $10.

CFO Mark Chancy and president William Rogers would receive 153,347 and 209,559 options, respectively, at the same strike price.

While companies asking for such proposals may be on the rise, corporate governance experts doubt shareholders will welcome them with open arms.

“Given the amount of losses for investors, I would doubt that approval would become a trend,” says Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. “The shareholders [of SunTrust] have lost almost 90 percent of their value, too.”

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