Reprice

Unlocking the Secrets of Repricing Stock Options

Demystifying Repricing: A Comprehensive Guide

Repricing stock options involves a strategic maneuver by companies to exchange worthless employee stock options for new ones with intrinsic value. This practice often emerges when a company's share prices plummet below the exercise price of existing options, prompting the need to retain or incentivize executives and key employees. Let's delve into the intricacies of repricing stock options, exploring its nuances and implications.

Key Takeaways

• Repricing occurs when companies replace underwater stock options with new options at a lower strike price.
• It is a strategic move to retain top talent amidst adverse market conditions.
• Repricing may entail tax implications for both the company and the recipients.
• Various approaches, such as restricted stock swaps and make-up grants, are utilized in repricing strategies.

Understanding the Dynamics of Repricing

While repricing stock options is not a novel concept, it gained prevalence post the dot-com bubble burst in 2000 and the global financial crisis of 2008-09. As stock prices plummeted, existing employee stock options became "underwater," with their strike prices exceeding current market values. To counter this, companies resorted to repricing to maintain a competitive edge in attracting and retaining talent.

Navigating Special Considerations in Repricing

Companies employ diverse strategies in repricing stock options, ranging from issuing restricted stock to granting additional options. Each approach entails unique tax and accounting considerations, influencing the decision-making process of firms. Moreover, under Financial Accounting Standards Board (FASB) regulations, firms must adhere to specific guidelines to mitigate variable accounting treatment.

Addressing Common Queries on Repricing

• Can You Reprice Stock Options? Yes, stock options can be repriced through various methods, including lowering the exercise price or replacing them entirely with new options.
• Why Do Companies Reprice Stock Options? Companies reprice stock options to maintain employee motivation, attract top talent, and restore value amidst adverse economic conditions.
• Can You Exercise Underwater Stock Options? While technically feasible, exercising underwater stock options is not advisable due to paying more for shares than their market value and foregoing tax-loss benefits.