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Stock Option Repricing: Heads I Win, Tails You Lo
Introduction
In most publicly traded companies, stock options are a big part of executive compensation, favored as a way to bind the financial interests of executives with shareholders. Although the exerci price of the options is fixed at the time of grant, some companies reprice stock options when stock price drops below the exerci price. The recent downturn in stock markets has prompted many companies to jump on the repricing bandwagon ( Business Week, December11, 2000). Repricing occurs in two ways: (1) either the exerci price is lowered, or (2) the existing options are cancelled and fresh options with a lower exerci price are issued.
Critics oppo repricing becau managers stand to gain whether stock price goes up or down. This undermines the incentive effects of stock options by eliminating the financial punishment to executives who mismanagement perhaps led to stock price decline in the first place. The ultimate irony is that repricing increas managerial compensation when managers ought to be fired for poor performance.
Institutional investors view repricing as a symptom of managerial entrenchment caud by ineffective corporate governance and routinely u their voting power to block repricing proposals. They are oppod to repricing becau猜灯谜的谜语 each new share granted to employees dilutes the司考时间 control and returns of existing stockholders.
Board of directors of repricing firms defend 乌海美食the practice by arguing that options far out-of-money are devoid of any motivational power, and repricing can restore managerial incentives. Another explanation, prevalent in Silicon Valley, is that repricing is necessary to retain talented employees who would be otherwi lured by rival firms. The firms grant employees stock options to conrve cash and view repricing as necessary to pres
erve their most valuable ast – human capital. An implicit assumption is that retaining the executives is esntial to business survival and improved firm performance.
Suggestions
Theoretical literature suggests that repricing can be an effective antidote to the problems of low employee morale and high珍珠粉的用法 turnover especially in firms where intellectual capital is the most important ast. However, due to weakness in corporate governance and dysfunctional incentives under the current regulatory regime, repricing has lost its purpo and resulted in undesirable outcomes. To mitigate the side-effects of repricing, we offer the following suggestions: (1) educate public about the true economic costs of stock options, (2) promote regulatory changes, (3) strengthen corporate governance, and (4) revi CEO compensation plans.
1. Educate public about the true economic costs of stock options
Many corporate boards perceive repricing as a low cost option becau repricing does no
t require companies to record an accounting charge and there is no cash outflow. The only cost is equity dilution when options are exercid. 党的工作纪律The dilution effect can be easily offt by share repurchas. It is little wonder that the boards tend to reprice when stock prices fall.
Some politicians have repeatedly made statements that employee stock options have no value if the strike price is equal to the market price on the grant date. Their statements reflect either a tremendous lack of knowledge about accounting or considerable intent to deceive. Yet, the claim that stock options have no value at the grant date ems to be widely held both within the business community and the general public.
Ex ante economic cost of an option is the amount of money an outside investor would pay if the company decides to ll such options rather than giving them to executives. Ex post economic cost of the option is the difference between strike price and the market price on the date options are exercid. Accounting and finance academics can play a uful role in educating executives, directors, politicians, and the general public about the 有趣的趣怎么写
true economic costs of options. They can help corporate boards, human resource managers, and executives understand how option valuation formulas such as Black-Scholes or Binomial models work so that tho involved in designing the compensation mix realize that both stock option grants and repricing existing options are costly to the company. An increa in the awareness about the true economic costs of options will also exert pressure on policy makers to change the accounting or tax regulations to make such costs explicit and ensure that repricing firms bear the costs.
2. Promote regulatory changes
Two most critical regulatory reforms needed are (1) to ensure that the cost of options is recognized explicitly in the financial statements, and (2) that there is symmetry between accounting and tax treatments. Financial economists agree that stock options are costly. In a recent testimony to U.S. Senate Finance Committee, Federal Rerve Bank Chairman Alan Greenspan described the vere market distortions from not showing the cost of options in financial statements. In the same hearings, Nobel Laureate Professor J
oph Stiglitz talked about the misinformation in the markets and advocated that stock option costs be recognized as an expen since reasonable estimates of values are available. exchangeWhen options are exercid in the future, the actual cost, which is the difference between the market price and exerci price, can be determined and any discrepancy between the estimated cost at the time of grant and actual costs can be adjusted against income. If the options are not exercid, the estimated stock option cost can be reverd. This will discourage the counterproductive behavior of giving out excess options as if they were free and encourage companies to provide executives with the right kind of incentives such as the theoretically superior indexed-options.
张淙洋
