‘Underwater’ stock options: Whether to stay put or swim out
Leave the current underwater options unchanged. The argument for this approach is that the option holders feel the same pressure as an owner of the company, and will be keen on the rapid growth of the company’s performance to ensure wealth creation. Thus, if option holders know that their existing options are going to remain unchanged, they will put in greater hard-work to ensure some value from the options before they expire.
Provide alternatives to swim out. A flip side to leaving the current underwater options unchanged is that it will not be able to achieve its general objective of retaining and motivating the employees and the company is running the risk that the most-prized talent will leave. Further, the stock prices may have been artificially gravitated due to the general downturn and, thus, they may not reflect the correct picture of company performance and the true value of the work of their employees.
An alternative to swim-out can take any of the following forms:
* Underwater options may be bailed out by options that have an exercise price equal to the current market price. One key downturn to such an alternative is that
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