In the year-and-a-half since, the company's stock price climbed back to about $24 a share, before slipping to about $20 a share in early July. At $24 a share, Krasnoff's 70,000 repriced stock options were worth $468,300. Even at the stock's recent price of $20, Krasnoff's options are back "in the money."
Krasnoff isn't the only Florida executive for whom a company generously repriced stock options in the last couple of years. In the fall of 1998, Fort Lauderdale-based SportsLine.com (see "The Playmaker," page 98) cut in half the exercise price on stock options granted to four of its top managers, from $29.44 a share to $14.06. After the repricing, the Internet company's stock price soared above $60 a share before falling back to the mid-teens this spring along with most dot-coms. Forcenergy, an oil and gas exploration company that recently moved its headquarters from Miami to New Orleans, repriced nearly 2.6 million stock options with exercise prices ranging from $10 to $26.75 held by five top executives as part of a bankruptcy reorganization plan. The new exercise price is $1.27. In early July, Forcenergy shares were trading for $20.
The practice of repricing stock options may help keep executives and other employees content for the moment, but the practice is controversial. The issue is whether resetting the exercise price defeats the original intent of granting stock options -- to reward executives for good performance and align their financial interests with those of shareholders.
Critics of repricing ask: Why should CEOs be rewarded when a company's stock sinks? Shareholders don't get that opportunity. Moreover, others argue, some companies reprice stock options in a knee-jerk reaction to temporary dips in their stock prices. The whole exercise, they say, ends up providing some behind-the-back gravy rather than an incentive to reward good performance. "It's sort of like, 'Heads I win; tails you lose'," says Howard Schilit, director of the Center for Financial Research and Analysis in Rockville, Md.
The counterargument? In general, resetting the exercise price on stock options may not be the right course of action, but there are times when it serves legitimate business objectives and the best interests of a company. For example, a stock price might be depressed not because of management's performance but because of an industrywide problem.
The biggest argument for repricing is that it may help retain key executives who may look elsewhere if they're holding worthless stock options. In the long run, the argument goes, it might be cheaper to reprice stock options than have to hire new managers. "It is unfair to generalize that repricing options is always a bad idea," says Gardner Davis, a partner in the law firm of Foley & Lardner. "To the extent stock options are granted to compensate employees for their personal contribution and the company's success, repricing might be appropriate."
Repricing stock options isn't just for corporate big shots, either. At Tampa-based Reptron Electronics, a distributor of electronic components, directors lowered the exercise price on options held by all of its employees when the company's stock plummeted from a high of $25 a share to $4.
Reptron says it was able to keep key managers and salespeople from jumping ship by repricing everyone's stock options from the mid-teens down to $6 a share. Fighting an industrywide glut of product, a drop in sales and a failed attempt to merge with a competitor, Reptron has struggled back, recently posting its first profitable quarter in two years. Its stock has rebounded, trading for about $12 a share in early July. "Our repricing provided the employee retention we intended," says Michael Branca, Reptron's chief financial officer. "We believe it was in the best interest of shareholders."
Still, repricing stock options carries a question mark. The Securities and Exchange Commission has made public companies disclose such repricings in annual proxy filings. And in recent years, big institutional shareholders with an activist bent, such as the California Public Employees' Retirement System and the State of Wisconsin Investment Board, have attacked the practice. "Our institutional shareholders don't get to reprice," says Scott Fenn, executive director of the Investor Responsibility Research Center, a Washington, D.C., group that represents institutional shareholders.
Meanwhile, the Financial Accounting Standards Board -- the organization that sets accounting rules -- has changed the way it views the practice. From now on, companies that reprice employee or director stock options must "expense" the value of that repricing against earnings.
Until now the granting of stock options and the repricing of options have been considered "fixed" accounting, so long as a company used the market price to set the exercise price of the options -- that is it had no effect on earnings. But in March, FASB decided that because the repricing of stock options in effect changes the "fixed" nature of the original stock grants by lowering the exercise price, companies now must apply "variable" accounting methods. In essence, that means a company will have to deduct the difference in value between the original stock options and the repriced options from its earnings.
The new standard will mean some companies such as SportsLine.com won't be repricing anymore because the repricing will reduce earnings and run the risk of angering shareholders.
Kenneth Sanders, SportsLine's chief financial officer, says it would be too expensive to reprice options as it did earlier. Even Branca, Reptron's CFO, says his company probably wouldn't reprice under the new rules.
"The smart companies won't deal with repricings anymore," says Dominic Pino, an audit partner at Pricewaterhouse-Coopers in Miami.
But with dot-com stocks sliding, not everyone will be deterred. Many Internet executives now own worthless stock options. And because many of those companies don't have earnings, what's one more expense when balanced against losing key managers? If there are repricings this year, they won't be made public until companies file their 2000 proxy statements, mostly by early next year.
At least one company has already repriced this year. Lone Star Steakhouse & Saloon, a Wichita, Kan.-based restaurant chain, repriced stock options for employees and directors.
"It's not going away," says Ann Yerger, director of research at the Council of Institutional Investors in Washington, D.C. "I think repricing is alive and well."