NYT: Heads They Win, Tails They Win a Bit Less

The Times looks at a piece of the unaccountability culture in corporate America: Changing stock-option strike prices (legally) to make them less underwater.

The lede:

Employee pay is often tied to a company’s fortune — until things turn sour.

The Times’s lead example is a company that dropped its strike price by 69 percent to within shouting range of its current price:

Composite Technology, which makes electric cables and other products, decided in January to lower the price at which its workers could use their stock options to buy shares in the company. The managers and directors slashed the price on all of the company’s 23.4 million options to 35 cents.

The move still leaves the company’s chief executive, Benton H. Wilcoxon, and others holding options that are underwater — meaning the price of exercising the options is above the current market price. But now Mr. Wilcoxon will be able to book a profit if the stock price increases by less than half, rather than quadrupling.

The repricing could be of particular benefit to Mr. Wilcoxon, who has a whopping 4.2 million options, previously priced at $1.13. The company lost $53 million in its latest fiscal year, and its stock fell to 27 cents on Thursday from as high as $1.36 last July.

Nothing like rewarding failure.

What’s interesting is that the NYT says some companies like Starbucks and Intel are specifically excluding executives from these plans. I would have liked to have had that quantified somehow—or at least estimated. I think executives self-dealing by changing their option prices is quite a different story than just changing it for employees.

That doesn’t mean changing them for employees is necessarily right, though. Just that it’s less icky.

As the Times points out:

The moves are usually described as important for retaining employees, especially as stock options that vest over several years look utterly worthless in the current market. With prices plunging across a variety of industries, companies also often assert that stock price movements are not really a reflection of employee performance.

It’s especially important for a CEO like Wilcoxon to retain himself.

But the point of options is that they’re options (obviously). Stock goes up, you win. Stock goes down, you don’t—but you don’t lose. At least for the sake of optics, new options would seem better.

Because changing prices is just unfair to shareholders:

But the moves leave shareholder advocates fuming. Owners of company stock reap no monetary benefit from repricing of options, advocates say — only employees do. The process, in their view, is fundamentally unfair. Modifying the options means employees gain from stock price increases, while investors feel the brunt of stock price declines.

Nice that the Times is pointing this out.

Has America ever needed a media watchdog more than now? Help us by joining CJR today.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.