Grant Thornton Offers Underwater Stock Option Service

September 28, 2009 ( - Grant Thornton LLP's Compensation and Benefits Consulting and Valuation Services groups have combined their resources to offer a new Underwater Stock Option service to help public companies develop strategies to address outstanding stock options that now cannot be cashed out for a profit.

According to a press release, the new service helps companies come up with a strategic framework for exploring an exchange strategy; analyze the extent of the issue and model alternative scenarios that quantify program effects on cost, dilution and likely participation; value the options; understand the SFAS 123(R) and section 162(m) implications of any exchange program; and assist in communicating the program to participants and supporting the program’s administrative requirements upon implementation.

Grant Thornton explained that in most cases, companies that have underwater stock options have four alternative solutions: exchange underwater options for new options; exchange underwater options for restricted stock or restricted stock units (RSUs); exchange underwater options for cash; or do nothing. Of the approximately 140 exchange programs implemented or pending this year, it has been about an even split between an exchange for options and exchange for stock, the announcement said.

Grant Thornton recommends five steps for evaluating and implementing an exchange program:

  • Assess and quantify the problem and alternative solutions;
  • Design and test the program;
  • Determine ‘go/no go’ status of exchange and other equity incentive solutions;
  • Submit for board of directors and shareholder approval (as required); and
  • Implement and communicate.

“Addressing the underwater option issue brings with it various cost, valuation and tax challenges,” said Neil Beaton, national partner-in-charge of Grant Thornton’s Valuation Services group, in the announcement. “It is important that companies with underwater stock options evaluate each of the options available to them and choose the one that best fits its employee compensation needs.”

A recent Grant Thornton survey found approximately two-thirds of public companies have more than 75% of their outstanding stock options under water.

More information is here .