Stock Option Repricing: Employees Benefit But What about Investors?

When the stock price of computer networking equipment maker Brocade Communications Systems skidded in late 2002, the pain was widespread. But it did not fall equally on all investors. Like other companies in similar situations, Brocade protected one class of investors – employees with stock options whose strike, or exercise price, had fallen below the market value – by simply issuing new stock options at the market price. The company said its actions would help retain talented employees who might otherwise leave. Is that justification valid? And should investors oppose this strategy? A new paper co-authored by Wharton accounting professor Mary Ellen Carter examines the relationship between repricing underwater stock options and retaining employees.

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