Magazine article Workforce Management

JPMorgan Stock Option Plan Throws a Lifeline to Employees When Shares Are 'Underwater'

Magazine article Workforce Management

JPMorgan Stock Option Plan Throws a Lifeline to Employees When Shares Are 'Underwater'

Article excerpt

The program allows workers to get value out of worthless options and could benefit companies facing new rules on expense reporting

SOME COMPANIES are beginning to doubt the value of stock options as a compensation tool, and it's easy to see why. There has been a spate of lawsuits involving company stock, brought by employees who believed they were misled about how well the stock was performing. Meanwhile, new accounting rules will require firms to expense stock options on their income statements beginning in their next fiscal year.

But if a new program by JPMorgan catches on, options could regain some of their cachet.

Giving company stock options to employees was a prevalent compensation and retention strategy in the '90s, particularly at technology companies. But after three years of bear markets, more than 50 percent of employees found themselves with options that were "underwater"-their value was less than the exercise price.

Microsoft was one company to experience this. "Human resources executives were getting calls from employees saying, 'My options may vest, but they are going to be worthless,'" says Robert Barbetti, managing director at JPMorgan Private Bank.

The technology company decided to stop offering stock options in favor of giving restricted stock, which are grants of shares that vest at the end of a given period if an employee remains on staff. This allowed employees to earn actual shares of Microsoft stock over time, rather than just the option to purchase stock at a set price. But that didn't help the employees who still had options that were underwater.

That's where JPMorgan came in. The investment bank offered to buy the employees' underwater stock options through a transferable stock option program so that it could use the options as another trading tool in its hedging strategy. With the deal, JPMorgan could trade each option it bought with a separate trade in the stock market that both hedges the bet and gives the bank a margin of profit. "We don't necessarily care if stock goes up or down, just that it does go up or down," says David Seaman, a managing director at JPMorgan.

The move would allow employees to sell a third of their shares upfront and then the rest after two years. The price the employee would get would depend on the maturity of the options. "This was part of a retention strategy," Seaman says.


To avoid hurting shareholders of Microsoft by potentially diluting the value of the stock, the company truncated the maturity of the options sold to employees. While this meant that Microsoft employees sold the options for below the potential full market value, the shorter maturity period also reduced the potential for dilution of company stock.

"Microsoft wanted to design this in a way that it split up the benefit between the employees and the shareholders," Seaman says. Employees were still able to get cash for options that could be worthless, depending on how the stock performs in the future, he says.

For example, if an employee was granted options at $33 a share with an expiration of five years and the stock was now at $26 a share, the employee could sell the options to JPMorgan for $4.59 a share. "The majority of employees feel that options are not worth the theoretical value in the first place," Seaman says.

Fifty-one percent of the 36,539 eligible employees participated in the program. "Employees said, 'I would rather get cash even if it's truncated in value,'" Seaman says. JPMorgan is pitching its transferable stock option program as an initiative that companies could implement on an ongoing basis. …

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