Under the company's plan, options that have already vested could be converted into a lesser number of actual shares. That basically equates to a windfall for employees, who will be able to trade options that are far below their exercise price for actual shares that are currently worth about $13 apiece.
The move also runs the risk of drawing the wrath of shareholders, who have seen the company's shares plummet from a high of more than $270 in August 2000.
"It sounds like a bit of a giveaway," said Charles Elson, a professor of corporate governance at the University of Delaware.
With many tech companies trading at a fraction of the price when many of their options were issued, firms have tried a number of approaches to try and make sure they are keeping their employees. But shareholders have also lost a great deal of money investing in these same companies over the past few years and are increasingly taking actions designed at reining in perceived compensation excesses. Last week, for example, Hewlett-Packard shareholders defied management and passed a resolution opposing the award of large severance packages without shareowner approval.
A Broadcom representative said the company uses stock-based compensation as a key component of its pay packages, which helps to attract and retain workers for the longer term, and that workers who joined in the last three years have not been able to gain some cash in the short term.
"We're able to put some cash in the pockets of employees who have been in a liquidity crunch, if you will, over the last several years," the representative said.
While many companies have simply allowed employees to exchange their underwater options for lower-priced ones down the road, Broadcom is not the first company to allow employees to trade their underwater option for something with immediate value.
Last August, Siebel Systems approved a plan that allowed employees (aside from CEO Tom Siebel) to getpriced above $40 that they had. Most employees took the company up on the offer, with . Nvidia had a that also allowed employees to trade underwater options for a lesser number of actual shares.
Investors, at least initially, appeared to shrug off the move. Shares of Broadcom were trading Monday at $13.61, up 48 cents, or more than 3 percent amid a generally strong market.
A key question is whether the company strikes the right balance in setting its exchange ratios, said Horace Nash, a Mountain View, Calif.-based lawyer at Fenwick & West.
"These kinds of programs are a sensible reaction to stock option overhang at some companies," Nash said. "My view is also that they are misused at some companies."
The ratio of options to shares in the Broadcom plan varies, but works out to, on average, about three options for each share granted, according to a Broadcom representative. The program applies to options priced $23.58 and higher.
Accounting regulations require the company to treat such a move as compensation, hence the potential for hundreds of millions of dollars in noncash charges. As many as 13 million shares could be given to employees under Broadcom's plan. Employees will be responsible for the payroll tax associated with the move, Broadcom said. A separate program will allow employees with options to turn in those options that have not yet vested and receive an equal or lesser number of new options in six months and a day, with a new strike price equal to the price of shares at that time.
In its press release announcing the move, Broadcom said the programs reduce the number of options the company has outstanding, known as an options "overhang."
"We believe that our program creates a winning approach for our employees as well as our nonemployee shareholders," interim CEO Lanny Ross said in a statement. "Our employees, who have a significant equity interest in Broadcom, win through immediate and potentially long-term financial reward for their hard work and competitive drive. We believe the combination of employee retention and reduced overhang provide our shareholders with the greatest potential value in the long run."
The company said it expects to begin the programs some time on or after May 5. The program requires the review of the Securities and Exchange Commission, but is not being put to a vote of shareholders.
"That seems to be running against the tide of increased shareholder activism these days," Nash said. "Companies doing this now without shareholder approval or some kind of consensus are tempting fate."
Both company management and the board of directors approved the plan, according to a Broadcom representative.
Another issue to explore, Nash said, is whether a particular plan allows directors and officers to take part in the exchange.
"It's one thing for general employees," Nash said. "Shareholders feel very differently about the CEO and the CFO and the vice president of sales that did get the company in the pickle they are in."
In Broadcom's case, directors are not eligible, while other officers are.
Elson said at some companies frustrated investors may look to oust directors perceived as being unconcerned with compensation issues.
"They are very angry and with good reason," Elson said. "This eventually could translate to the replacement of some boards of directors for companies that engage in these tactics."