June 18, 2020
Modifying Outstanding Equity: Is Repricing Back On The Table?
– Liz Dunshee
A recent DealBook article and FT analysis found that about 50 companies gave their CEOs 50% more options than last year – and although the grant size was due to formulas and the timing was consistent with past practices, execs are profiting off of market upswings and it’s not playing well right now. But thanks to market volatility, there are plenty of companies facing the opposite problem – option grants that are now underwater and doing little to motivate execs.
Lynn blogged recently about what to consider if you’re modifying performance awards or granting supplemental awards due to pandemic-related underperformance. This 7-page Aon memo gives even more detail on alternatives – including repricings, which have been rare in recent years but may be an option of last resort for companies whose stock prices haven’t recovered. Here’s an excerpt (and as Gunster’s Bob Lamm discusses in this blog, don’t lose sight of the optics of pay changes):
A repricing or an exchange is more complex than additional grants, but it may be an attractive program to return value to employees and address retention concerns. We recommend a balanced approach to any stock option exchange by looking at the impact to dilution, potentially putting shares back in the pool (if allowed by your plan and shareholders), and not creating significant incremental expense. In order to balance these priorities, companies should consider exchange ratios above 1-for-1, which offsets some incremental expense and helps to address dilution.
For most companies, repricings or exchanges require shareholder approval, which poses significant obstacles to the design and implementation of the program. If taking this action does not require shareholder approval, it is still important to understand the institutional shareholder perspective, to have a business justification for your actions and to be prepared to respond to the shareholder criticism that will come—which may include negative say-on-pay votes and/or votes against the election of board members.