A new price is a way for executives and upper-level managers to exchange old stock options for newer, more valuable options when the value of the company’s stock falls, creating an incentive to stay loyal to the company. This practice is sometimes criticized for rewarding executives of a failing company.
A new price is an option, usually offered to executives and upper-level managers of a company, that allows people to exchange old stock options for newer, more valuable options when the value of the company’s stock falls. The new pricing is intended to create an incentive to stay loyal to the company even when stock values fall. Companies must report the transaction along with other financial disclosures, and it is considered a form of employee benefit. This practice is sometimes criticized as rewarding the executives of a failing company, since they get valuable stock options when the value of the company falls.
Employee stock options carry the right, but not the obligation, to buy shares in the company that individuals work for. When a company’s value falls, these options are said to be out of the money, because the price offered on the option is higher than the current market value of the company’s stock. Out-of-the-money, employee stock options are worthless since there would be no reason to exercise the option when the shares can be purchased at a lower price on the open market.
When this situation arises, the company can offer a new price. Employees can exchange their in-the-money options for new options that are said to be in-the-money, valued at the current value of the company. These options are worth more and are more valuable to employees. A new price is typically offered to top-level executives to keep them loyal to the company during a difficult financial period, giving them a reason to continue working for the company rather than seek employment elsewhere.
When a new price is offered, details will be distributed to those eligible for the offer. There is usually no reason to reject a new price, as it allows people to exchange worthless employee stock options for more valuable ones. Once the exchange is processed, the company reports it, and employees may also be required to report it as a form of compensation, since they received something of value in the transaction. Accountants can provide more information on how to handle notification of a new price on taxes and other financial disclosures.
Critics of repricing opportunities argue that they allow the people at the helm of a failing company to squeeze more value out of it and can serve as a reward for allowing a company’s value to fall. However, the people who are allowed to trade their stock options are hoping for an increase in the company’s fortunes that will make their options more valuable by allowing them to buy shares at a low price and resell them at a much higher price. Having these options is an incentive to improve the company’s performance and generate more profits in the future.
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