"Public companies in many industries find themselves between a rock and a hard place. On the one hand, they risk executive flight as the retentive and motivational value of options falls precipitately; on the other hand, they risk the ire of stockholders," said Steven Hall, Managing Director, Steven Hall & Partners. "While it might make sense to award new option tranches at the lower stock price to retain and focus employees in a challenging business environment, this is tempered by the fact that existing shareholders have also lost in the recent market and are unable to participate in the upside opportunity of new shares." Additionally, the grant of additional shares further dilutes shareholders and carries a costly charge to earnings.
Among the industries most severely hit are airlines, automotives, financials, builders, pharmaceuticals, telecommunications and retail, while companies in the energy sector, utilities, iron and steel, chemicals, consumer staples and defense continue to offer meaningful wealth accumulation opportunities to employees. The company hardest hit by recent stock price declines was Beazer Homes USA, whose current stock price of $7.74 is 82 percent below the average exercise price of the 2,135,573 stock options currently outstanding. Second in line was healthcare services company Tenet Healthcare, with an average exercise price that is 79 percent below the current stock price.
"This is the time when Board Compensation Committees must determine the best pay strategy to preserve key talent," said Steven Hall, Managing Director, Steven Hall & Partners. "In some cases, we find that companies apply a selective approach by opting to button down a few critical contributors and hoping for the best with the rest." According to Hall, immediate solutions for companies in this position include reviewing the corporate succession plan to identify key talent, determining what incentives are needed and redesigning compensation programs accordingly.
