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Tech Check
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Let the Options Re-Pricing Stimulus Begin
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There's been so much talk about the economic stimulus plan, TARP, the misguided auto industry bail-out, mortgages and the government strapping on that enormous financial feedbag, that there's one other idea that should get serious consideration, especially with big cap tech companies like Microsoft [MSFT
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], Apple [AAPL
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] and Google [GOOG
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] watching stock prices plunge.
A massive options re-pricing effort.
Fact is, so many workers in Tech Land face an economic double-whammy: Taking jobs for below-market salaries in exchange for stock options that could have -- should have -- increased their compensation handsomely and offset those lower wages. At least that's the way it's normally worked in the past. Sure, the dot com bursting bubble taught a hard lesson in options wealth, but that implosion occurred largely because we all lost track of what real value was. Eyeballs replaced revenue and profits and paper profits turned out not to be worth the very paper they were printed on. But when you're talking about companies like Google and Microsoft and so many others that generate real profits, and sit on real mountains of cash, options grants seemed like relatively safe bets for workers willing to take equity in exchange for cash up front, and share in the success of the company.
Today, success has nothing to do with it. Apple has one of its best quarters in history, sits atop $30 billion in cash, and yet its stock is stuck in the market mud. (Apple doesn't grant options anymore, choosing instead to rely on so-called Restricted Stock Units for executive compensation.) But the same holds true for Google, a company that still relies heavily on stock options, and yet 14,000 workers hired over the last three years are underwater on them. The option strike price is actually higher than the stock is worth.
"It's very difficult for companies, who want to keep their top people motivated, if all of the options are underwater," John Challenger of Challenger Gray & Christmas tells me. "That kind of motivation and incentive has just disappeared."
So Google is one of the first big names to embark on a re-pricing effort to re-incentivize (is that a word?) employees by lowering the strike price to add value where it has since evaporated. Great for employees, but sucks for retail investors who don't get the same treatment. The Google model should be far more widely adopted. Why rely on the government for economic stimulus when so many publicly traded companies, not just here in Silicon Valley, but nationwide, have the ability to stimulate the economy all on their own. Beginning with their own employees and executives.
This isn't just about top level managers reaping big rewards -- and suffering huge paper losses -- because of the stock collapse, and ensuing options evaporation, going on. Sure, big execs grab big headlines. Compensation expert Equilar reports that on average, the average CEO options award among the top 150 Silicon Valley companies declined from $17.5 million to $6.3 million since the start of last year. Intel [INTC
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] CEO Paul Otellini's 5.2 million options were worth about $19 million at the start of last year. Today, they have no value. Intel Chairman Craig Barrett's options were worth about $16 million. Today, they're worthless. Shantanu Narayen, the CEO of Adobe [ADBE
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], enjoyed options worth $14.1 million at the start of last year; today, the same block is worth $53,000.
And as companies hoard cash in these tough times, 116 companies have reduced salaries for executive officers, trying to offset those reductions with new stock options.
But it's also about rank and file workers who receive options. Millions of them. At the start of last year, about 47.6 percent of Silicon Valley's top 150 companies suffered options with strike prices higher than the stock price itself. Today, it's 80 percent.
So now, many companies are embarking on re-pricing strategies, not just Google. A handful of companies through the course of last year began re-pricing options. But the trend dramatically increased beginning in November, and the number has now tripled from the fourth quarter of last year to the first quarter of this year. There needs to be more. Many, many more.
I would argue that this ought to be merely the tip of the iceberg. I get the argument against re-pricing, that companies ought to suffer as much as their shareholders. (Some homeowners, and our own Rick Santelli have made the same argument about mortgages: Why should my neighbor get a loan modification and I can't?) But happy, retained workers make for more successful companies, and eventually higher share prices. And workers with a newfound sense of their own personal, economic value are more likely to spend. And the cycle begins anew, though hopefully with a once-burned/twice learned reserve. And this cycle begins without a government hand-out.
There's also a silver lining to consider, courtesy of Cypress Semiconductor CEO TJ Rodgers, who tells me, "It's a great time for startups. Startups can get started and go to the biggest and best companies in Silicon Valley (to attract new workers or investment) and go, 'How'd you like some penny-stock in a start-up. Your options are underwater and will remain underwater for a long time anyway. So the whole turnover process of people moving on to new things in Silicon Valley is being fueled by this downturn."
He makes the strong case that the stock market needs to be recharged, showing me a chart of initial public offerings going back to 1973. In 1997, ahead of the dot com boom and bust, nearly 700 companies went public. But since then, a precipitous slide, and over the past year, a horrific dearth of offerings, made even more problematic by the options mess and complicated, restrictive Financial Accounting Standards Board rules that hamstring companies and their finance teams from coming up with robust, free-market options plans. Says Rodgers: "Eight IPOs in America, one in Silicon Valley in all of 2008. That's a disaster. This is a way to become poor. We need to get the Sarbannes-Oxley guys and the FASB guys smacked upside the head. This is gonna hurt everybody in the country unless it gets changed."
Reprice options. Unlock value. Let entrepreneurs, innovation and the free-market fix itself. And fix the economy along the way.
Questions? Comments?
Data is a real-time snapshot *Data is delayed at least 15 minutes
