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More firms lowering option prices

When Premenos Technology's stock plummeted back in October 1996, company executives knew they had to take action.

When Premenos Technology's stock plummeted to 8 from 16 in a single day back in October 1996, company executives knew they had to take action.

The Concord, California-based e-commerce firm, which went public a year earlier, had been a darling on Wall Street until reporting a disappointing third quarter. With the slot for its chief executive empty and one of the tightest job markets in years, Premenos knew it risked losing employees it had worked hard to attract.

Joining a growing number of companies--especially those in the high-tech industry--Premenos warded off any potential exodus of workers by repricing its employee stock options. The company dropped the "strike price" at which employees could buy future shares to just over 9 from a range of 14 to 20, with the caveat that vesting schedules would have to be reset.

stock chart Premenos is not alone. The volatility of technology stocks coupled with the white-hot technology job market has prompted scores of companies to reprice stock options in the last few years. Only last month, Netscape Communications said it would lower its employees' strike price to adjust for the sharp drops in its stock's value during the past year.

Other companies that have undertaken similar action include Apple Computer, which has lowered its option prices repeatedly during the last 15 years, 3Com, Ascend Communications, Kodak, 3DO, and Advanced Gravis.

But not everyone has been happy with the practice, which critics say can reward executives and employees for poor performance. A few days after Netscape lowered its stock option price, for example, a shareholder sued the company, claiming that executives approved the plan "to enrich themselves at the expense of...public stockholders."

"From the point of view of outside shareholders and especially institutional shareholders, they don't like it one bit," said Jon Holman, president of the Holman Group, an employment consulting firm in San Francisco. He noted that many corporate bylaws now require repricings to be approved first by shareholders.

Companies defend stock repricing as an essential tactic to keep employees. At Premenos, for example, the move was crucial to its success, according to vice president and chief financial officer Ward Wolff.

"It's something that can be an effective retention tool and one that, if done properly, will benefit all shareholders on a long-term basis," he said. "If your employees are walking out the door because of underpriced options, that's a pretty compelling reason to act in shareholders' interest."

It also allowed longtime employees to receive the same incentives as Premenos's incoming CEO, Wolff added.

As it turns out, employees who took Premenos up on the offer have fared well. Last October, Atlanta-based Harbinger bought Premenos, boosting its share price to nearly 16.

Holman agreed that repricing stock options can be beneficial. The incentives act as "golden handcuffs" that lock employees into their current job. But "there are no golden handcuffs if people are sitting there at 45 a share and the stock is trading at 12," he said.

"There's no motivation for them to stay unless they think the stock is going to go back to 30, 40, or 50 and stocks at 12 don't usually do that," Holman said.

Still, Wolff said companies considering the move should first get input from financial advisers and large shareholders. "It's something I wouldn't recommend companies do often," he said. "It's a [corporate] decision that the board in its fiduciary role has to make."