Question

A controversial practice with employee stock options is repricing. What happens is that a company experiences a stock price decrease, which leaves employee stock options far out of the money or “underwater.” In such cases, many companies have “repriced” or “restruck” the options, meaning that the company leaves the original terms of the option intact, but lowers the strike price. Proponents of repricing argue that because the option is very unlikely to end in the money because of the stock price decline, the motivational force is lost. Opponents argue that repricing is in essence a reward for failure. How do you evaluate this argument? How does the possibility of repricing affect the value of an employee stock option at the time it is granted?

Answer 1

Ansuel Page No 6 The evaluation of the argument for or against repricing is open-ended. There are valid oreasons of the discussion. The value of the employce sfock option is increased by the stepricing. Now consider an extreme; # company announces the employee stock options wooth is minimum of $10 at espiration. The value of the option incoreases if the all values less than & 10 are no longer possible.