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• W255328792 abstract "Companies scramble to remedy ailing incentive compensation plans. As the stock markets have slumped, the use of stock options as the ideal form of employee compensation has lost some of its luster. Companies may choose to redesign their compensation plans due to the wholesale losses in their stock value. In an upside-down investing world, financial managers, option holders and CPAs need to be aware of alternative stock option plan strategies. Until last year, many companies looked at stock options as a no-lose proposition for everyone. Statistics compiled by the National Association of Stock Plan Professionals (NASPP) and PricewaterhouseCoopers LLP quantify that enthusiasm. In 2000, 44% of the 345 U.S. companies participating in the survey offered stock options as compensation to employees at the nonexempt level, compared with just 34% in 1998. Now, particularly in the technology, telecommunications and dot.com industries, many employees' stock options are underwater (below the strike price and out of the money) and, at least for the present, are considered worthless. To fill the breach, companies are frantically scrambling to find remedial compensation approaches to protect employees from market losses while also addressing accounting, tax and corporate governance concerns. These alternatives, discussed here, include repricing stock options, canceling options and reissuing them at a lower strike price after a six-month-and-one-day waiting period and substituting underperforming stock options with other payment programs, such as restricted stock. The complexion of employee incentive programs is already changing, says John Boma, CPA and senior vice-president at Mullin Consulting Inc., in Minneapolis, which advises businesses on compensation strategies. Stock options, the most widely used form of incentive compensation, give employees the right to buy a set number of shares of company stock at a set price for a certain period. They became ubiquitous because compensating employees with stock options entails no cash expenditures. At the same time, the business receives favorable accounting treatment since there are no charges to earnings. Stock options that are performance-based, moreover, offer the company a way around paying taxes on cash compensation for the CEO and other top officers, for whom no more than $1 million in annual cash compensation, not tied to performance, is tax deductible (for more on this subject, see Planning for the Cap, JofA, Oct.00, page 39). Employees also benefited when they exercised their stock options and held on to their shares. When the two-year holding-period stipulation was met, cashing in one's shares allowed for taxation at the 20% capital gains rate, not at the higher marginal income tax rate. REPRICING NO LONGER ROUTINE Until recently, when markets went south, many companies would hand out more options at lower prices--an acceptable and simple means to protect employees from a business's poor performance. But new accounting rules discourage companies from making a quick leap to reprice stock options in response to a market downturn. Most companies choosing the repricing strategy, typically formerly high-flying technology and dot-com companies, have little or no earnings and include (according to Institutional Shareholder Services (ISS) in Bethesda, Maryland) Amazon.com, Broadbase Software, Interwoven, Critical Path and Network Associates. These entities must act carefully because of FASB Interpretation no. 44, Accounting for Certain Transactions Involving Stock Compensation, (an interpretation to APB Opinion no. 25, Accounting for Stock Issued to Employees). Under Interpretation no. 44, adopted in July 2000, routine repricing becomes much more painful for companies. Simply lowering the exercise price of existing options or perhaps canceling them and regranting a new set of options now forces companies to mark the value of the awards to the market price each quarter for the entire life of the options. …" @default.
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• W255328792 date "2001-10-01" @default.
• W255328792 modified "2023-09-24" @default.
• W255328792 title "Stock Option Pitfalls and Strategies Du Jour" @default.
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