However, there is higher cash outflow for the company and, unlike stock options, the employees are not motivated by any future share price appreciation.
* A fusion plan can also be explored, wherein it can be decided that if the options still remain underwater as on the exercise date, the company may replace them with a cash award of a pre-determined value; and if the same are ‘in the money’, the employee can exercise them and realise the value from the market.
No one method will work for all employers and, thus, based on the impact analysis, the management can decide on the viable way to deal with the issue.
The author is director, Tax & Regulatory Services, Ernst & Young. Views expressed are personal