Companies Increasingly Allow Options Exchange

The study of 61 firms found that of the three types of exchange programs – options-for-options, options-for-stock, and options-for-cash – companies are nearly evenly split between using options-for-options and options-for-stock programs, according to a Radford press release. Options-for-Options (46%) is the cancellation of underwater options followed by an immediate re-grant of (fewer) new options, while Options-for-Stock (49%) is the cancellation of underwater options followed by an immediate re-grant of (significantly fewer) new shares of restricted stock/units.

Only 5% of companies used Options-for-Cash, which is the cancellation of underwater options for a cash payment.

“After years of being viewed negatively by shareholders, employee stock option repricings, or the practice of lowering the purchase price of an outstanding option after a drop in company stock value, is once again gaining positive traction in the form of exchange programs,” said Brett Harsen, vice president, Radford Surveys + Consulting, in the release. “Most investors will approve a responsible proposed exchange of underwater options that is beneficial to all stakeholders – the company, employees and shareholders.”

Accounting Implications

As for accounting implications of such exchange programs, according to Terry Adamson, senior vice president, Radford Surveys + Consulting, determining the actual ratio of old underwater option shares to new option or restricted stock shares is an accounting-driven exercise focused on the goal of cost neutrality. No additional charges to a company’s earnings will be incurred as long as the fair value of the new award is no greater than the fair value of the surrendered underwater options, the press release said.

For more information on underwater options, visit http://www.underwaterexchange.com .