The privately held site, which handles the Internet operations for the newspaper chain, is allowing employees to cancel their existing stockoptions for the Net unit and receive a new grant six to seven months later,according to a copy of a memo obtained by CNET News.com. Employees faced a deadline Thursday on whether they'd participate and bet the options' value continues its slide.
Tech companies are struggling to retain employees who have seen theironce-lucrative stock options sink. Employees, who once received largeportions of their lofty compensations via options, are finding the price toexercise those options is often higher than the value of thestock--essentially making them worthless.
Companies, as a result, are turning to a technique that regrants options,or other hybrids of that practice. This move lets them avoid the earningsthat would come with repricing options, according to a change toaccounting rules last year.
"When you reprice options, it'll be an expense to the company if the stockprice goes back up--that's what makes them so unpopular," said John Hamm,partner with accounting firm Ernest & Young in Dallas. "But regrantingoptions and some other techniques allow a company to avoid this charge. The only thing you have to weigh it against is how thecompany's shareholders will react, especially those that rode the train down."
In the case of KnightRidder.com, the privately held company had itsoptions, separate from the stock of parent company Knight Ridder, valued at$5.23 a share last March. But that value has since fallen to $2.45,according to the memo. Calls to KnightRidder.com were not returned.
Although employees will receive the same number of options they previously held and maintain the existing vesting schedule, they must remain with thecompany for at least six months to receive the new options grant--and hope the options' value continues itsslide. If the stock were to trade at $10 six months from now, employees'strike price would be at that level, rather than the lower March levels of around $5.
KnightRidder.com employees also will forgo any vesting credit during thesix-month period before the new options grant, according to the memo.
The upside, however, is that if the options' value continues its slide ormaintains its current value, the opportunity for a profit is greater with the lower strike price.
Sprint was among the first to publicly announce it would use this regranting technique, Hamm said, noting the telecommunications companyunveiled its plans a few months ago.
He cautioned, however, that companies that opt for this arrangement may find the Securities and Exchange Commission asking them to jump through additional hoops.
Toys "R" Us canceled its options in the past year but immediately gave employees restricted shares of stock. Because the toy maker did not wait six months, it was subject to an earnings hit. The company tried to minimize the affect on earnings by issuing fewer restricted shares for the options that were exchanged, Hamm said.
Earlier this year, Amazon.com instituted a plan similar to thetoy maker's move, except it re-granted a smaller number of options rather than restricted shares. Meanwhile, Microsoft and Lucent Technologies resorted to issuing a new grant of options without touching the old grant.
"Since it didn't involve canceling the old grant, shareholders facedgreater dilution," Hamm said.
In weighing the concerns of shareholders and employees, companies face atough balancing act.
Tech companies, in particular, may lose valuable employees who no longerhave a financial incentive to stay. But they could alienate shareholdersover stock dilution and a sense that company executives aren't sharing thepain of a depressed stock price.
"Companies need to determine whether their core business is highlydependent on retaining a brain trust of employees, or whether it's more ofa manufacturing plant," Hamm said.