Repricing is an option for senior managers to exchange old stock options for newer, more valuable ones when a company’s stock value falls. It is a form of employee benefit, but critics argue it rewards executives of failing companies. Repricing incentivizes employees to stick with the company and improve its performance.
A reprice is an option, usually offered to senior managers and executives of a company, that allows people to swap old stock options for newer, more valuable options when the value of the company’s stock falls. Repricing is meant to create an incentive to stick with the company even if stock values go down. Companies are required to report the transaction along with other financial information and it is considered a form of employee benefit. This practice is sometimes criticized as a reward for the executives of a failing company, as they get valuable stock options when the company’s value falls.
Employee stock options have the right, but not the obligation, to buy stock in the company people work for. When a company’s value falls, these options are said to be out of the money, because the price offered in the option is higher than the current market value of the company’s stock. Out of the money employee stock options are effectively worthless, as there would be no reason to exercise the option when the stock can be bought cheaper on the open market.
When this situation occurs, the company may offer a repricing. Employees can trade their out-of-the-money options for new options that are said to be at-the-money, valued at the current value of the company. These options are worth more and are more valuable to employees. Reimbursement is usually offered to upper-level executives to keep them loyal to the company during a tough financial time, giving them a reason to continue working for the company instead of looking for work elsewhere.
When a new price is offered, the details will be distributed to people eligible for the offer. There is usually no reason to refuse a reprice, as it allows people to trade worthless employee stock options for more valuable ones. Once the trade is processed, the company reports it, and employees may also be required to report it as a form of compensation, as they received something of value in the transaction. Accountants can provide more information on how to handle reporting a tax reprice and other financial information.
Critics of revaluation opportunities argue that they allow the people at the helm of a failing company to derive more value from it and can serve as a reward for allowing a company to decline in value. The people who are allowed to trade their stock options, however, are banking on an increase in the company’s fortune that will make their options more valuable by allowing them to buy shares at a low price and sell them at a much higher price. Owning these options is an incentive to improve the company’s performance and generate more profits in the future.
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