Full Text Weekly Mag. Now that some of the air has been let out of the Internet balloon on Wall Street, many technology companies are faced with a situation in which they have compensated their critical talent with stock options that are underwater, or worthless. While the market volatility hit technology companies especially hard, there has been a trickle-down effect that negatively impacted companies in other industries. This presents a serious and immediate challenge of essentially re-loading employees in a way that satisfies them enough to avoid the temptation of looking elsewhere in this tight labor market. There are four primary solutions that should be considered by any company trying to work their way around this increasingly common challenge.
Most employers grant stock options according to regular calendar cycles during the fiscal year.
One strategy available to companies struggling with underwater stock options is to go out of their normal pattern and grant new options immediately at today s low market valuations. This offers employees more upside potential in their stock options. This can be an attractive solution for employers because it has the added benefit, like all fair market value options, of not being subject to expense charges on the company s income statement. However, the downside to the new grant is the additional dilutive effect it can have. If the stock price recovers to the point that both the old and new grants are in the money, either current shareholders face dilution from the option shares, or the company spends cash to buy back shares to avoid the dilution.