Firms refloat employees’ option hopes
As the stock market continues to founder, more companies -- especially tech firms -- are looking for ways to bring relief to workers whose compensation is largely tied to their employers’ share prices.
In January alone, more companies have offered to exchange or reprice stock options that have little chance of quick payoffs for their owners than in all of 2007, research firm Equilar Inc. said Friday. This year is also well ahead of 2008’s pace, and some of the actions are coming from well-known corporate names.
Internet giant Google Inc. and Starbucks Corp., the nation’s biggest coffeehouse chain, announced option exchange offers Thursday. The goal, the companies said, was to keep employees who might flee if they believed they were holding options that would stay worthless for a long time -- if not forever.
“Two or three years from now, we don’t want to be sitting here saying, ‘Why didn’t we lock in this employee?’ ” Google Chief Executive Eric Schmidt said in an interview Thursday. “This is the right time to be doing essentially what is a good long-term employee structure.”
Similar plans could be on the way as companies print their proxy statements in preparation for the spring wave of shareholder meetings.
The moves aren’t always popular with outside shareholders, who don’t get the chance for a “do over” when the value of their stock tanks. It also sends a downbeat message about the company’s prospects.
“It’s not encouraging,” said Anthony Valencia, managing director at TCW Group Inc. in Los Angeles, a large investment firm that owns Google shares. “It shows that the optimism about the business isn’t what you as a shareholder would hope it would be.”
It could also be a sign that more companies are poised to follow Google’s example.
“If the first month is any indication, we’re probably going to see the biggest year for option repricings and exchanges since the tech bubble burst in 2000-2001,” said Alexander Cwirko-Godycki, research manager at Equilar, which tracks data on executive pay.
The firm said 18 companies have announced option exchanges or repricing this year, compared with 58 last year and 17 in 2007. Half of this year’s announcements have come from tech companies.
Stock options, which allow the holder to buy stock at a future date for a specified price, make up a significant portion of employee compensation at some companies, especially tech firms. As options vest, they can be exercised and the employee can reap the gain on the difference between the option price and market value of the company’s stock.
That works only if the company’s shares are trading above the value of the options. And with Google’s stock down 56% from the all-time high of $741.79 it reached in November 2007, about 85% of the company’s employees are holding options that are “underwater.”
To keep workers happy, a company can reprice existing options to a value at or below its current stock price or it can exchange the old options for new ones. Google is offering to exchange “underwater” options on a 1-to-1 basis with options tied to the company’s closing stock price on March 2.
The plan also adds 12 months to the original vesting schedule, helping to ensure that employees can’t immediately cash in the new options and then jump ship anyway.
That can mollify shareholders, experts said, by demonstrating that the program really is aimed at keeping valued employees on board.
Under Google’s compensation plan, option exchanges need only the approval of the board, which the company said it had obtained. The company said the plan would result in a $460-million accounting charge over five years.
So far, Google shareholders don’t seem too upset about the plan. The company’s stock rose $18.20, almost 6%, to $324.70 on Friday.
“You’ve got to keep your talent,” Valencia said. “You’re seeing senior people leave Google, which would have been unheard of a few years ago.”
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Times staff writer Jessica Guynn in San Francisco contributed to this report.
