Salvaged From the Depths

Enterprises are rescuing underwater options.

Frank Briamonte is pretty upbeat - for a guy whose job it is to be spokesman for Lucent Technologies Inc., that is. After all, how happy would you be if your employers stock took a deep-sea dive, sinking to $7.43 on April 12, down from a 52-week high of $67.18?

Luckily for Briamontes wallet, Lucent is one of scores of companies - including WebMethods Inc., Clarent Corp. and Tibco Software Inc., to name a few - that are attempting to fish employee stock options out from beneath the deep, blue sea.

Lucent first offered options in August at an exercise price of $42. They slid underwater. In December, Lucent offered new options that werent supposed to be available until this year. Then, in February, with shares at $11.60, Lucent awarded some of its managers one additional stock option for every two options that carried an exercise price above $12.14 per share.

Briamonte was one of those managers. "It was definitely a morale boost," he said. "It just showed me the company was committed to making employees feel like they had a stake in the success of the company."

Of course, injecting value into anemic stock comes with a price. Shareholders dont like the pessimistic message it sends about profitability, and there can be significant accounting charges. And if the Securities and Exchange Commission has its way, these stock option salvage dives will get a lot more attention soon. Still, doing what it takes to retain key IT talent is a price more and more companies are willing to pay.

Indeed, more than 90 percent of the 100 technology companies surveyed recently by iQuantic Inc., a compensation consultancy based in San Francisco, cited the ability to retain talent as the most important reason for addressing underwater options, the term for stock options that trade below their exercise price. The iQuantic study showed that almost half of the 80 percent of companies that reported underwater options have already responded in some way and that 25 percent are considering action.

"Options are a great way to hold employees if the share price goes up considerably" because they tie workers to a company for at least as long as it takes for their options to vest, said Jack Dolmat-Connell, a principal in the Southboro, Mass., office of iQuantic. "If they walk away early, they walk away from money."

That line of thinking made sense to Tibco. The software company, based in Palo Alto, Calif., announced a voluntary stock option exchange last month. "This program shows our commitment to motivating and retaining our employees and to Tibcos long-term success," said Chairman and CEO Vivek Ranadivé. Tibco closed at $11.14 April 12, compared with a high of $129 over the last year. Its employees will be allowed to cancel options at an exercise price of $10.37 or more.

At Lucent, in Murray Hill, N.J., the decision to offer additional options is vital to the companys resiliency, Briamonte said. "When you see such a change in the stock prices, you need to reincent your employees," he said. "Never before has employee commitment to Lucents success been more critical."

And Lucent certainly has plenty it has to bounce back from, including the layoff of 16,000 employees, announced in January. In light of such bleak times, retaining remaining staff takes on new urgency.

In over their heads

None of this is escaping the notice of the SEC, however. The agency is pushing hard to change some of the rules regarding stock options, said Dolmat-Connell. In January, the agency took a first step and required all public companies to include in their annual reports any rescissions - a practice whereby companies cancel unfavorable option exchanges made by executives looking to improve their own financial worth.

As for how they plan to address any attempt by the SEC to tighten rules governing stock options, the officials interviewed for this story have adopted a wait-and-see approach. Thats prudent, they said, given the uncertain scope and timeline for any SEC action.

Briamonte said he could not speculate on what Lucent might do concerning its stock options package. But, again, hes optimistic. "Well continue to offer a competitive compensation plan while adhering to SEC guidelines," he said.

And why shouldnt he be optimistic? At least hes working at a proactive company, as opposed to those that are just standing by and watching stocks sink, as described by John Challenger, CEO of Challenger, Gray and Christmas, an outplacement consultancy based in Chicago. "Theyre stuck," Challenger said. "Some companies are repricing, others are holding it off." Others still are "willing to implode" by letting their talented people leave in search of better options. And with the still-steep demand for IT talent, thats one approach thats akin to cutting a vein in shark-infested waters.