Repricing Stock Options: Definition, History, Implementation, and Implications

Repricing involves the exchange of worthless employee stock options for new options that have intrinsic value. This is a common practice for companies to retain or incentivize executives and other highly valued employees when the value of the company’s shares falls below the exercise price or break-even point for the options issued in the original incentive program.

Employee stock options are a vital component of compensation packages offered by many companies, especially startups and high-growth firms. These options provide employees with the opportunity to purchase company shares at a predetermined price, known as the strike price, at a future date. Repricing of employee stock options occurs when companies make adjustments to the terms of existing options to align them with current market conditions. This practice is commonly undertaken when the value of the company’s shares falls below the exercise price of the original options, rendering them “underwater” or essentially worthless.

The practice of repricing stock options gained prominence after significant market downturns, such as the bursting of the dot-com bubble in 2000 and the financial crisis of 2008-09. During these periods, many companies experienced substantial declines in their stock prices, leading to a situation where existing employee stock options were no longer valuable. As a result, companies sought ways to retain and incentivize key employees by replacing worthless options with new ones that have intrinsic value.

Implementing repricing strategies involves various approaches tailored to the company’s specific circumstances and objectives. Some companies opt to transition from stock options to restricted stock grants or immediately exercisable options to provide employees with more certainty and tangible ownership stakes in the company. Others choose to issue additional stock options with adjusted terms, such as lower strike prices, to bring them back “in the money” and restore their value.

Repricing employee stock options has financial and regulatory implications for both companies and employees. From a financial perspective, repricing increases the option expenses that companies must report in their financial statements, impacting their net income. Additionally, the fair market value of the underlying stock used as the new strike price must be determined accurately, especially for privately held companies, as it directly affects existing shareholders’ interests.

In summary, repricing employee stock options is a strategic decision undertaken by companies to retain and motivate key employees during challenging market conditions. By adjusting the terms of existing options to reflect current market realities, companies can ensure that their compensation packages remain competitive and aligned with employee expectations. However, it is essential for companies to consider the financial and regulatory implications of repricing and implement strategies that best suit their unique circumstances.

Repricing involves the exchange of worthless employee stock options for new options with intrinsic value to retain or incentivize executives and highly valued employees.

Yes, stock options can be repriced using various methods, including lowering the exercise price or replacing them entirely with at-the-money options.

Companies reprice stock options to bring value back to them when the options become worthless due to adverse changes in the economy, helping retain and attract top talent.

Technically, you can exercise underwater stock options, but it is not recommended as you will pay more for the shares than the current market price.

Repricing may have tax implications for both the issuing firm and recipients, depending on the specific circumstances and applicable tax laws.