With the downturn in Internet stocks, millions upon millions of dollars in employee stock options have evaporated. Many dot-com employees took substantial pay cuts from their former jobs, with the hope that they would get rich from stock options.

Companies Move to Reprice Employees’ Stock Options - WSJ

Many holders of these options are now deciding to pack it in and leave - either moving to other Internet companies when they can get pre-IPO option packages at a time where the stock is at a low valuation, or leaving the Internet world to find a job in the more traditional corporate world.

In order to try to stem such defections, Internet companies sometimes decide to reprice their stock options. Repricing options may seem to be the perfect quick fix to the problem. The employee is happy because he or she is in the same situation economically as before the stock lost half its value.

The company is happy because it can retain its employees with little or no cost incurred. Unfortunately, earlier this year this simple solution became substantially more expensive to implement.

In March , FASB Financial Accounting Standards Board issued Interpretation No. Under this interpretation, companies can be forced to record an expense when they reprice options. This new rule may be enough to deter public companies from repricing options.

After all, companies anticipate what the financial statements will look like for the quarter, and the market has certain expectations as well. Companies that decide that they would rather issue new options to employees at the current stock price than reprice the existing options need to make sure they have enough shares reserved under their stock option plans.

Because a cancellation followed by a reissuance within six months would be deemed a repricing under Interpretation 44, companies must keep the existing options outstanding while issuing new options.

The issuance of new options to a large number of employees while the existing options remain outstanding may necessitate amending the existing stock option plan or adopting a new one. Companies should review their existing stock option plan to determine whether or not they have enough shares reserved under their plan to issue additional options. Interpretation 44 has made the decision whether or not to reprice options more complex.

However, even before the new accounting rule was implemented, there were reasons to avoid repricing options. The following section provides insight into some of the positive and negative aspects associated with repricing options. Repricing options could help ensure that employees are not punished for the downturn in the stock that may have had little to do with their performance.

Repricing options will help retain employees. If the options are so underwater that they may never be of any value, the employee may have no incentive to remain at the company until they vest.

Options are a cheap way to increase employees' compensation. If options are of no value, employees may demand higher salaries. Stockholders have been hurt by the decline in stock prices.

Since they are not able to simply reprice their stock to soften the blow of the downturn in the market, they may resent that employees are getting a special deal. Stock options are granted in order to give employees an incentive to work hard, as they will share in the successes of the company. If employees have their options repriced when the stock does not perform well, the incentive factor is diluted. Companies should be confident that they would be able to drive their stock prices higher.

Repricing gives the impression that the company does not think the stock price will recover over time. The new FASB accounting rule provides that companies must take a charge against earnings when they reprice options.

This accounting charge could make repricing very expensive to companies. Together with the traditional arguments against repricing stock options, Interpretation 44 is putting Internet companies in an uncomfortable position.

Some companies may feel that the only way to retain their key employees is to reprice employee stock options. These companies should weigh the accounting risks against the employment benefits to determine if repricing is the best course of action. If a company does decide to reprice its employee stock options due to the downturn in the technology sector, the company should make it clear to its stockholders that this decision is a one-time event due to an extremely inflated exercise price on the options, rather than a routine action that will be taken from time to time when the stock price falls.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. To print this article, all you need is to be registered on Mondaq. Click to Login as an existing user or Register so you can print this article.

Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available the Content. You may not use electronic or other means to extract details or information about Mondaq. All such documents and related graphics are provided "as is" without warranty of any kind. The documents and related graphics published on this server could include technical inaccuracies or typographical errors.

Changes are periodically added to the information herein. Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:.

Mondaq and its affiliate sites do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here. If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here.

We require site users to register with Mondaq and its affiliate sites to view the free information on the site. We also collect information from our users at several different points on the websites: We are only able to provide the material on the Mondaq and its affiliate sites site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us e.

We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page.

Solium | Glossary

We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe mondaq. In order to receive Mondaq News Alerts, users have to complete a separate registration form.

This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website or its affiliate sites for 12 months.

We also use the cookie to personalise a user's experience of the site for example to show information specific to a user's region. As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled in these circumstances we advise you to attempt to locate the information you require elsewhere on the web.

Dividends, Interest Rates And Their Effect On Stock Options

However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately remove it by selecting the 'Log Off' menu option as the last thing you do when you use the site. Some of our business partners may use cookies on our site for example, advertisers. However, we have no access to or control over these cookies and we are not aware of any at present that do so.

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information. This web site contains links to other sites. Please be aware that Mondaq or its affiliate sites are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites.

This privacy statement applies solely to information collected by this Web site. From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information such as name and delivery address , and demographic information such as postcode, age level. Contact information will be used to notify the winners and award prizes.

Survey information will be used for purposes of monitoring or improving the functionality of the site. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once.

The friend may contact Mondaq to request the removal of this information from our database. When users submit sensitive information via the website, your information is protected using firewalls and other security technology.

If you have any questions about the security at our website, you can send an email to webmaster mondaq. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email.

Users will have a choice as to whether or not we use their information in this different manner.

We will use information in accordance with the privacy policy under which the information was collected. You can contact us with comments or queries at enquiries mondaq. If for some reason you believe Mondaq Ltd. We use cookies to give you the best online experience. By using our website you agree to our use of cookies in accordance with our cookie policy.

The Pros And Cons Of Repricing Stock Options Last Updated: New Rule Changes Everything Unfortunately, earlier this year this simple solution became substantially more expensive to implement.

Positive Aspects Of Repricing Repricing options could help ensure that employees are not punished for the downturn in the stock that may have had little to do with their performance. Negative Aspects Of Repricing Stockholders have been hurt by the decline in stock prices.

Final Considerations Together with the traditional arguments against repricing stock options, Interpretation 44 is putting Internet companies in an uncomfortable position. Do you have a Question or Comment? Interested in the next Webinar on this Topic? Click here to register your Interest. Events from this Firm. More from this Firm. More from this Author. More Popular Related Articles on Employment and HR from USA.

Howard Stern's Day Off: The Danger Of Digging For Details When Employees Call In Sick. Shock Jock Howard Stern took an unexpected day off from his radio show last week which prompted a firestorm of speculation on social media as to the underlying reason for his absence. A federal appellate court recently ruled that an employee's request for 12 months of additional medical leave was not reasonable, and thereby upheld the dismissal of her ADA lawsuit Parents everywhere are familiar with the joys and trials of the three trimesters of pregnancy.

The ADA And FMLA: Top 10 Issues That Employers Should Know. From expanding accommodation requests to intermittent leave, employers continue to face challenging issues related to the Americans with Disabilities Act ADA and Family and Medical Leave Act FMLA. What Do You Do When An Employee Loses a Loved One? We all know that employees do not leave their personal selves at the workplace door.

The experiences we have outside of work inform who we are at work. How Weak Are Employee "Nondisclosure Agreements"? The Answer May Make You Gag.

We live in a world of "leaking" and threats of dire consequences for the leakers. Does an employer have the legal means to prevent disclosure of information acquired during employment? Handling An Employee Who Won't Shake Hands For Religious Reasons. Religious issues in the workplace are challenging both from a legal and practical standpoint. Managers and HR professionals want employees to feel accepted and included, and they don't IRS Issues Warning on Tax Treatment of Wellness Program Rewards.

Employers offering wellness program rewards should be aware that some medical insurance salespeople are recommending arrangements that fail to comply with applicable law. Mondaq Advice Center MACs. Trademarks in SAARC Countries. Real Estate and Construction. The Changing Landscape In Pay Equity Laws And How Employers Can Prepare. Time Spent In Post-Shift Security Checks Once Again Held Not Compensable.

The Supreme Court's Church Plan Decision. New York City Implements "Fair Workweek" Package Of Laws For Fast Food And Retail Employees. Nevada Labor Commissioner Advises That Employers May Compensate Certain Employees Under Fluctuating Work Week Method. DOL To Take Steps To Address Persuader, Overtime Rules. The Pay Equity March On The West Coast Begins: Oregon Signs Expansive Equal Pay Law And San Francisco Considers Salary History Ban. DOL Withdraws Independent Contractor And Joint Employer Guidance.

The Rise Of The Group Health Insurance Captive. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P. Recently viewed items tracks each article you read and gives you a quick link back to that article if you need to review it again.

Discussing What The Universal Paid Family Leave Act Of Means For D. Bradley Arant Boult Cummings LLP. Worldwide United States Latin America Europe Asia Pacific Australasia Asia European Union Australia U. Brazil Canada China Colombia Cyprus France Germany Hungary Ireland Italy Japan Luxembourg Mexico Netherlands Poland Singapore UK United States Jersey Guernsey.

This Week Next Two Weeks Next Month Next Quarter. Business Breakfast Conference Other Podcast Seminar Speaking Engagement Webinar Workshop. Australia - Brisbane - Melbourne - Perth - Sydney Brazil - San Paulo Canada - Ontario - Toronto - Vancouver China - Unknown Colombia - Unknown Cyprus - Nicosia France - Paris Germany - Frankfurt Guernsey - St Peter Port Hungary - Budapest Ireland - Dublin - Ennis Italy - Milan Japan - Tokyo Jersey - Unknown Luxembourg - Luxembourg Mexico - Mexico Netherlands - Amsterdam Poland - Warsaw Singapore - Singapore UK - London United States - Arizona - Atlanta - Boston - California - Dallas - Denver - Idaho Falls - Las Vegas - Los Angeles - New York - Salt Lake City - San Diego - San Francisco - Texas - Washington, DC.

Contributors A-Z Most Popular Contributors Most Popular Authors Author League Award Winners Become a Contributor. About Mondaq Become a Contributor Become a Partner What's New Contact Us. Become a MAC Partner. Mondaq Advice Centre - About. Energy and Natural Resources. Food, Drugs, Healthcare, Life Sciences. Media, Telecoms, IT, Entertainment. This service is completely free. Mondaq Topics -- Select your Interests.

Check to state you have read and agree to our Terms and Conditions.