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Siebel offers stock-option relief

The software maker says it will allow employees with worthless stock options to exchange them for stock or cash.

Siebel Systems will allow employees with worthless stock options to exchange them for stock or cash, the company said.

Stock options grant the holder the right to buy a share of stock at a specific price, called the strike price. After the tech bubble burst, many option-holders were left with so-called underwater options--that is, the strike price is higher than the current value of the stock.

Siebel, which makes software for customer service and sales, has suffered along with the rest of the tech world in the face of decreased corporate spending. Its stock, which reached a 52-week high of $38.38, closed Thursday at $8.81. The exchange program, disclosed in a filing with the Securities and Exchange Commission, will apply to outstanding options with exercise prices at or above $40.

Subject to certain restrictions, the deal calls for employees to get $1.85 in cash for every share on which they have an option. But if that amounts to more than $5,000, the employee will get the payout in stock. The offer does not apply to members of the board of directors, the company said.

Siebel said that roughly 31.9 million shares are eligible under the offer and that it expects to take a charge of $63.6 million in the quarter ending Sept. 30.

Underwater options have presented a problem for tech companies that want to maintain the incentives associated with stock-option grants without having to deal with the accounting and tax problems that can arise.

Accounting rules make it expensive to simply lower the exercise price of options. Some companies have used the "six-and-one" method, in which employees agree to cancel their outstanding options in return for being granted new options at least six months and one day later. That plan allows companies to bypass accounting issues, but critics say it encourages employees to root for the stock to stay low until their new options are granted.

The Siebel plan is somewhat unusual. While it's not unheard of for companies to buy out options, that kind of deal usually is offered to top-level executives, as opposed to the rank and file.

"We believe that providing our employees with the opportunity to participate in the offer will improve employee morale and better align our compensation programs with the interests of our stockholders," the Siebel filling states.

Banc of America Securities analyst Bob Austrian said that Siebel was "taking the bull by the horns in doing something to address employee retention," adding that Siebel may spur other tech companies to follow suit.

"They've just opened a Pandora's box," he said.

Reuters contributed to this story.