Presidio Pay Blog Providing Thoughtful, Strategic Advice for Critical Compensation Issues

Week of March 16th

What's News is a regularly updated summary of news stories, typically related to compensation, that we are following, find interesting, or find baffling.

Week of March 16th…

Lost this week among all of the AIG bonus calamity (our thoughts to come on this shortly) were a number of companies seeking shareholder approval for option exchanges:

• Google announced that approximately 93% of its underwater options granted to employees will be exchanged on a one-to-one basis.  Employees typically receive fewer number of options when they surrender their underwater options because they are trading in something they view as worthless for something of value, which is why many feel Google’s one-to-one exchange is quite a generous move.

• Starbucks Corp. won shareholder approval for their proposed option exchange.

• Ebay Inc hopes to allow employees to exchange their underwater options for a lesser number of restricted stock units.

• Eligible Motorola Inc employees can surrender their underwater options for either a lesser number of options or restricted stock units.

Common arguments that companies use when requesting option-exchange programs from shareholders include:

Retention:  Options are supposed to motivate employees to perform well and share in company success.  In addition, some companies are freezing salaries, suspending 401(k) matching, and reducing various benefits and perquisites to preserve cash in this economic climate.  This makes the reliance on options as a retention tool even stronger.  However, as noted in our recent article “The Trouble with Options”, while employees lost the opportunity to seek capital gain in their options, shareholders of the company continue to see their investment fall.

Manage Overhang Rates:  According to its proxy filing,  Ebay currently has approximately 62.53 million options that are underwater and eligible for option exchange. The number of options outstanding will be reduced if the underwater options can be exchanged for a reduced amount of restricted stock units and therefore reduce the risk of potential dilution.

Recapturing Existing Compensation Expenses:  Starbucks notes that the Company already recognized about $232.3 million as compensation expense for underwater options that are not going to be exercised, and exchange those options for new options will maximize the efficiency of those resources.  However, shareholders may not see this the same way, as they have already recognized this expense in the eroded value of their investments.