The Advisors' Blog

– Julie Hoffman, CompensationStandards.com

In considering an option repricing program, a significant factor for companies to weigh is the advisory services’ positions on repricing, as their support is usually necessary to win shareholder approval. RiskMetrics’s general view is that option repricing is never a good practice. Repricing weakens—and if done on a serial basis, destroys—the incentives that make up the foundation of a stock option program. However, RMG has taken a case-by-case approach in determining whether to support repricings and considers six factors in making its decision (the first two are the most important):

– Value neutrality – is the exchange value-for-value?
– Participation – are executive officers and directors included?
– Rationale – was the sustained stock price decline beyond management’s control?
– Timing – why is the company choosing to conduct a repricing at this particular time?
– Term and vesting of surrendered options – what is the duration, exercise price, and vesting of replacement awards?
– Disposition of cancelled option shares – will cancelled options shares be available for future issuance under the company’s plan(s)?

While these factors create a high burden, there is evidence that RMG does support repricing programs when warranted. For example, in determining whether to support Cardinal Health’s repricing proposal, RMG noted in their report that the program excludes NEOs and directors from participating and that the exchange was value-for-value. Additionally, because the proposed program would recycle surrendered shares by returning them to the pool, RMG conducted a burn-rate analysis and shareholder value transfer analysis on the potential cost of all plans and found the results to be better than industry averages. As a result, RMG considered the repricing program to be “reasonably structured” and recommended a “For” vote. The Special Meeting will be held June 23rd.

For more on repricings, see our “Stock Options” Practice Area. Also note that Panel 7.1 of the “17th Annual NASPP Conference” is a special Double Session entitled “How to Implement Responsible Option Exchange Programs AND Effectively Administering an Option Exchange Program ” devoted to this topic and the panel includes RiskMetrics’ Pat McGurn. Should be a good one…