More companies are executing their own
bailouts -- for holders of worthless stock options.
Thirty-five companies, including
MGM Mirage and
Toll Brothers Inc., have swapped options that are "underwater" --
meaning they can be exercised only at prices above today's levels -- for
other securities or cash this year. That's roughly twice as many as in
each of the past three years, according to compensation trackers Equilar
Inc. and Radford Surveys & Consulting.
Twelve other companies lowered, or are
planning to lower, the exercise price of some options. And 15 others are
proposing to exchange underwater options for cash or stock. Many more
exchanges are coming next year, experts say.
"We're going to see them go through the
roof," says Brett Harsen, a Radford Surveys vice president. He has advised
44 companies on option-exchange deals this year, compared with about three
a year for the past few years.
Companies issue stock options, which give
holders the right to buy stock at a set exercise price, as an incentive
for employees. Big option grants can swell the compensation of top brass,
but nonexecutives typically hold most of a company's options.
Companies say they're considering the swaps
to bolster employee morale because so many options are now worthless.
Equilar estimates that at 72% of Fortune 500 companies, the typical option
is underwater. Some 93% of options held by Fortune 500 CEOs have no value
at current prices, it says.
Option exchanges can rankle shareholders,
who complain that they don't get relief when share prices fall.
Shareholders rebelled when many tech companies repriced options after the
Internet-stock bubble crashed. That led to accounting and regulatory
changes that made option grants more costly and mandated shareholder
approval for most exchanges.
Rescuing underwater-option holders "is not
good behavior," says Edward Durkin, who oversees governance issues for the
pension fund of the United Brotherhood of Carpenters and Joiners. Options
are supposed to have value only if shares rise, so if prices fall,
"they're done," he says. The Carpenters this year voted against
option-exchange plans at Toll Brothers,
R.H. Donnelley Corp.,
Beazer Homes USA Inc. and
VMware Inc., among others, Mr. Durkin says.
Executives at Advanced Medical Optics Inc.,
a maker of medical devices for the eye, rejected option exchanges when
they pondered in October how to motivate employees amid a 67% plunge in
the company's share price since June. Fifty of the top officers elected
instead to give up around 785,000 underwater options, freeing the shares
attached for new equity grants. The move will also save the company $5
million to $10 million in future expenses, says Aimee Weisner, executive
vice president of administration.
Some companies craft option exchanges to
reduce shareholder opposition. Beazer shares fell around 50% to roughly $7
in the year before it put an exchange plan before investors in August. The
plan applied only to options and similar securities called
stock-appreciation rights with exercise prices of $26 and above, and it
excluded executives and directors. Investors approved the plan, which
would swap options for fewer restricted shares, but the company hasn't
implemented it yet.
Beazer's plan won the blessing of the
Florida State Board of Administration, which manages around $124 billion
in assets, most in the state's pension fund. The Florida agency typically
opposes option exchanges, but stocks have dropped so precipitously this
year that it's willing to consider them, says Michael McCauley, its senior
corporate governance officer.
"We'd rather have some incentive framework
in place than nothing," says Mr. McCauley. His agency recently revised its
guidelines so that it can support an option exchange if executives aren't
eligible to participate and it believes management isn't responsible for
the share-price drop.
Proxy advisers RiskMetrics Group and Glass,
Lewis & Co., whose recommendations are influential with institutional
investors, also say they will consider blessing option exchanges under
But option exchanges can also be tricky for
companies and employees, as the experience of Yellow Pages publisher R.H.
Donnelley shows. Donnelley's stock price fell 94% to around $5 in the year
to April 2008, rendering worthless nearly all of its options and
"The options had lost their primary
employee-retention value," says Chief Financial Officer Steve Blondy. He
also says the company no longer had enough shares for new grants, so it
was hoping to recycle shares attached to the cancelled options.
Donnelley proposed letting employees with
options whose exercise prices exceeded $10 exchange them for new
stock-appreciation rights that would vest over three years. Executives and
senior managers were included, but they could only exercise the new rights
if the company's shares topped $20. Donnelly added that provision to help
win investors over.
Florida's pension-fund agency voted against
the proposed exchange because executives were included. Mr. McCauley says
Donnelley was also more generous to its option holders than he liked.
The proposal passed anyway. In July,
Donnelly cancelled 4.6 million underwater options and appreciation rights
with exercise prices ranging from $10.78 to $78.01. It issued 1.2 million
new appreciation rights with an exercise price of $1.69, the average of
the stock's high and low prices on July 11, the last trading day before
The new appreciation rights haven't helped
employees yet. On Friday, Donnelley's shares closed at 40 cents. Donnelley
says it still thinks the exchange was effective.
Write to Phred Dvorak at