Repricing underwater stock options won't help you hold onto top executives, but it can reduce turnover among lower-level employees. So report Mary Ellen Carter and Luann J. Lynch, who have spent five years studying the controversial practice. The results of their research are scheduled to appear in the February 2004 issue of the Journal of Accounting and Economics.An option is underwater when its exercise price — the price at which the holder can purchase a share — exceeds the market price of the underlying stock. Companies can remedy this situation by reducing the strike price of their existing options. Or they can cancel them and issue new options at a lower exercise price. If the new issue occurs within six months of the cancellation, this also counts as repricing under current accounting standards.Whatever the method used, critics attack repricing as a transfer of wealth from shareholders to the very executives who should bear the responsibility for a company's woes. In reply, firms that reprice typically characterize the strategy as a critical employee retention tool.
