Stock options: overused and underwater; HR professionals face major challenges with this once-attractive recruiting and compensation tool. But there are remedies

Workforce, Jan, 2003 by Don Delves

Digging ourselves out of today's swamp is only half the battle. Going forward, it's important to decrease our lopsided reliance on options and develop better plans that combine a variety of cogent and creative strategies. We need to consider flexible, tailored compensation vehicles that are clearly aligned with the company's organizational objectives and desired risk profile.

This shift in strategy does not have to dilute executive pay. However, executive pay must become more balanced and directly aligned with the goals and strategy of the company--part of what we call a Balanced Incentive Portfolio. Packages may include a combination of options and long-term cash and stock incentives tied to core financial and non-financial goals. The options mat are granted should be more performance-based, with the exercise price increasing at a given percentage rate or fluctuating with the market. Such provisions would require the company to earn a minimum rate of return for shareholders before providing a return to executives and employees.

While there isn't a magic incantation to make the current problem of underwater stock options disappear, management can cope through measured actions such as a value-for-value cancel/re-issue, or replacing underwater options with restricted stock (in far fewer numbers). Looking ahead, companies must take prudent steps to avoid this problem in the future by developing and implementing more balanced incentives based on business fundamentals and measurable, controllable performance.