SBUX Starbucks Corporation

By Alix Stuart 

Stock-option exchanges are making a bit of a comeback, despite a strong stock market and worries about the shareholder pushback they can generate.

Such exchanges, which let employees trade nearly worthless options for new options or restricted stock, have been proposed or implemented by at least 10 publicly traded companies so far this year, according to proxy-advisory firm Institutional Shareholder Services -- up from seven last year, and three in 2014.

Options repricing surged in popularity after the dot-com bust in the early 2000s, then again following the financial crisis in 2009, when many employee stock options became underwater: The company's stock had fallen way below the price at which they had the right to buy shares.

Eighty companies including Apple Inc., Starbucks Corp. and Google -- now Alphabet Inc. -- allowed employees to trade in underwater options in 2009. Back then, about 25% of companies swapped the options without consulting shareholders, according to ISS data.

For the most part, the trend these days is confined to younger firms that have recently gone public, said Brett Harsen, partner for Radford, a part of Aon Hewitt, a consulting company.

"Companies that have lower values are competing for employees with companies with stronger equity," said Robert Finkel, a partner with the Boston-based law firm of Morse, Barnes-Brown & Pendleton PC. "And equity is still a very important part of compensation, particularly for technology companies."

Shares of Jive Software Inc., a maker of business software, slid below $4 in March from a high of $27.16 in 2012. That left more than 25% of the options held by the company's employees out of the money, with their strike prices far above Jive's then current trading price.

The Palo Alto, Calif., company pitched the idea of an option exchange to shareholders and a majority approved. Nearly 80% of eligible options were exchanged over the past two months for restricted stock units that vest over two years.

"We were looking for ways wherever we could to help the people who were staying with Jive be as incented and motivated as possible," said Bryan LeBlanc, Jive's finance chief.

In the exchange process, Jive and other companies are offering employees restricted stock units that automatically convert to shares in place of the options to eliminate future uncertainty.

Companies typically take great pains to ensure that exchange terms are acceptable to shareholders as well as employees. That means executives and directors don't participate and employees receive a value equivalent to their initial grant. While shareholders approve most exchanges, companies only float them when they know such approval is forthcoming, said Mr. Harsen.

Since 2012, Jive has used restricted stock exclusively for nonexecutive employee equity awards, said Mr. LeBlanc.

Restricted stock has become much more popular partly because it is easier to account for. It also lowers the risk to employees.

Such options exchanges can benefit companies by reducing compensation expenses, since companies are required to expense the value of outstanding stock options even when they are underwater.

And for employees who receive new options, there is no guarantee their prospects will improve. Electronics retailer hhgregg Inc. repriced options with a three-year vesting schedule for 58 employees on May 1, 2013 to the then-current trading price of $13.56, according to a filing. Since 2014, the stock hasn't returned to that level, and is currently trading around $2 per share.

A hhgregg representative declined to comment.

The process of structuring and executing an exchange can take up to 12 months and cost as much as $300,000, estimates Sorrell Johnson, senior equity compensation consultant with Stock & Options Solutions. Terms often change along the way, as an improving or declining stock price can affect the number of eligible options and the new strike price.

How effectively such exchanges are in retaining employees is hard to calculate, since most companies don't disclose turnover, which is subject to other factors in any case.

(END) Dow Jones Newswires

September 12, 2016 19:15 ET (23:15 GMT)

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