KnightRidder.com is the latest company in a growing list of Web businesses to try a new technique to lower stock option prices.
The privately held site, which handles the Internet operations for the newspaper chain, is allowing employees to cancel their existing stock
options for the Net unit and receive a new grant six to seven months later,
according to a copy of a memo obtained by CNET News.com. Employees faced a deadline Thursday on whether they'd participate and bet the options' value continues its slide.
Tech companies are struggling to retain employees who have seen their
once-lucrative stock options sink. Employees, who once received large
portions of their lofty compensations via options, are finding the price to
exercise those options is often higher than the value of the
stock--essentially making them worthless.
Companies, as a result, are turning to a technique that regrants options,
or other hybrids of that practice. This move lets them avoid the earnings
that would come with repricing options, according to a change to
accounting rules last year.
"When you reprice options, it'll be an expense to the company if the stock
price goes back up--that's what makes them so unpopular," said John Hamm,
partner with accounting firm Ernest & Young in Dallas. "But regranting
options and some other techniques allow a company to
avoid this charge. The only thing you have to weigh it against is how the
company's shareholders will react, especially those that rode the train down."
In the case of KnightRidder.com, the privately held company had its
options, separate from the stock of parent company Knight Ridder, valued at
$5.23 a share last March. But that value has since fallen to $2.45,
according to the memo. Calls to KnightRidder.com were not returned.
Although employees will receive the same number of options they previously held and maintain the existing vesting schedule, they must remain with the
company for at least six months
to receive the new options grant--and hope the options' value continues its
slide. If the stock were to trade at $10 six months from now, employees'
strike price would be at that level, rather than the lower March levels of around $5.
KnightRidder.com employees also will forgo any vesting credit during the
six-month period before the new options grant, according to the memo.
The upside, however, is that if the options' value continues its slide or
maintains its current value, the opportunity for a profit is greater with the lower strike price.
Sprint was among the first to publicly announce it would use this regranting technique, Hamm said, noting the telecommunications company
unveiled its plans a few months ago.
He cautioned, however, that companies that opt for this arrangement may find the Securities and Exchange Commission asking them to jump through additional hoops.
Toys "R" Us canceled its options in the past year but immediately gave employees restricted shares of stock. Because the toy maker did not wait six months, it was subject to an earnings hit. The company tried to minimize the affect on earnings by issuing fewer restricted shares for the options that were exchanged, Hamm said.
Earlier this year, Amazon.com instituted a plan similar to the
toy maker's move, except it re-granted a smaller number of options rather than restricted shares. Meanwhile, Microsoft and Lucent Technologies resorted to issuing a new grant of options without touching the old grant.
"Since it didn't involve canceling the old grant, shareholders faced
greater dilution," Hamm said.
In weighing the concerns of shareholders and employees, companies face a
tough balancing act.
Tech companies, in particular, may lose valuable employees who no longer
have a financial incentive to stay. But they could alienate shareholders
over stock dilution and a sense that company executives aren't sharing the
pain of a depressed stock price.
"Companies need to determine whether their core business is highly
dependent on retaining a brain trust of employees, or whether it's more of
a manufacturing plant," Hamm said.