As markets fell, employees’ stock options slid right “underwater”.
After a lengthy slide in the markets, many firms that got into the custom of compensating employees with stock options, now find themselves in an awkward position.
Their stocks have slid below the option price — gone underwater, as they say — and now for all intents and purposes, are worthless. Employees whose options vest would find themselves selling them for less than they paid.
As a result, some companies have had to revise the trigger price for their stock option plans.
Shareholders in Ottawa-based software company, Corel recently agreed to reduce the option price for the options of key executives to $5.70 from $15.25.
While it is an unpopular practice with some shareholders who resent that employees don’t have to share the pain of a drop in stock price, Stephen Quesnelle, vice-president of HR at Corel, said repricing is an essential tool for retention. Companies that don’t reprice stocks risk having those employees walk out the door.
In fact, repricing could be considered beneficial for shareholders, since it is part of a strategy to improve corporate performance. The recruiting market has improved for employers slightly in recent months, but holding onto key employees is still critical, explained Quesnelle. And while stock options are generally perceived to be a long-term retention tool, if employees don’t see any chance of their options going back above water in the near future, they are more likely to leave.
Corel is also unusual in that it grants options to all employees, he said. The company had already dropped the trigger price for options for other employees.
Many shareholders feel that stock option plans were put in place to motivate employees and align their interests with the shareholders, said Bonnie Flatt, an executive compensation consultant with William M. Mercer. When the stock does drop shareholders think the employees should bear some of the responsibility.
“I think whenever you look at the whole issue of repricing, you have to take a step back and look at a bunch of different factors,” said Flatt. For instance, is the drop the fault of the executive team or did market hype skew the value of the company and now a corrected market is showing the more accurate valuation.
Shareholders have to ask themselves if they priced the stock properly in the first place, she said.
Flatt agrees that repricing has become an essential part of retention strategies and so to a certain extent companies’ hands are tied if they want to remain competitive.
The issues that are still plaguing companies are how to attract and retain, and what kinds of culture and reward system are needed. One tool will continue to be the stock option.
And while companies will continue to offer stock options, there were certainly some lessons learned about how to do it better this time.
What was happening was companies were speeding up the vesting process. But during the halcyon days of a booming Nasdaq, some companies were granting options that would vest every month so that employees could cash them in quicker. “All it took was a couple of companies to do it and then it became the norm,” said Flatt.
At Corel, a greater emphasis is being put on tying employee behaviours to overall performance. Corel CEO, Derek Burney, meets with small groups of 50 to 70 employees every quarter to talk about how the company is performing. In the past, Corel was always a very entrepreneurial organization and they don’t want to move away from that, said Quesnelle. But going forward, they will also be keeping a closer eye on the corporate scorecard to make sure they are meeting targets and goals.
Their stocks have slid below the option price — gone underwater, as they say — and now for all intents and purposes, are worthless. Employees whose options vest would find themselves selling them for less than they paid.
As a result, some companies have had to revise the trigger price for their stock option plans.
Shareholders in Ottawa-based software company, Corel recently agreed to reduce the option price for the options of key executives to $5.70 from $15.25.
While it is an unpopular practice with some shareholders who resent that employees don’t have to share the pain of a drop in stock price, Stephen Quesnelle, vice-president of HR at Corel, said repricing is an essential tool for retention. Companies that don’t reprice stocks risk having those employees walk out the door.
In fact, repricing could be considered beneficial for shareholders, since it is part of a strategy to improve corporate performance. The recruiting market has improved for employers slightly in recent months, but holding onto key employees is still critical, explained Quesnelle. And while stock options are generally perceived to be a long-term retention tool, if employees don’t see any chance of their options going back above water in the near future, they are more likely to leave.
Corel is also unusual in that it grants options to all employees, he said. The company had already dropped the trigger price for options for other employees.
Many shareholders feel that stock option plans were put in place to motivate employees and align their interests with the shareholders, said Bonnie Flatt, an executive compensation consultant with William M. Mercer. When the stock does drop shareholders think the employees should bear some of the responsibility.
“I think whenever you look at the whole issue of repricing, you have to take a step back and look at a bunch of different factors,” said Flatt. For instance, is the drop the fault of the executive team or did market hype skew the value of the company and now a corrected market is showing the more accurate valuation.
Shareholders have to ask themselves if they priced the stock properly in the first place, she said.
Flatt agrees that repricing has become an essential part of retention strategies and so to a certain extent companies’ hands are tied if they want to remain competitive.
The issues that are still plaguing companies are how to attract and retain, and what kinds of culture and reward system are needed. One tool will continue to be the stock option.
And while companies will continue to offer stock options, there were certainly some lessons learned about how to do it better this time.
What was happening was companies were speeding up the vesting process. But during the halcyon days of a booming Nasdaq, some companies were granting options that would vest every month so that employees could cash them in quicker. “All it took was a couple of companies to do it and then it became the norm,” said Flatt.
At Corel, a greater emphasis is being put on tying employee behaviours to overall performance. Corel CEO, Derek Burney, meets with small groups of 50 to 70 employees every quarter to talk about how the company is performing. In the past, Corel was always a very entrepreneurial organization and they don’t want to move away from that, said Quesnelle. But going forward, they will also be keeping a closer eye on the corporate scorecard to make sure they are meeting targets and goals.
