On the decision to reprice stock options: almost never

Abstract

Purpose

Looks at the issue of repricing stock options for CEOs and other senior managers when existing option are under water. The board of directors has the option of exchanging existing options (i.e. the underwater options) for new options with a lower exercise price.

Design/methodology/approach

Opinion piece.

Findings

There is no evidence that repricing reduces CEO or top management turnover. In fact, top executives left a firm at a much higher rate than their counterparts in firms that did not reprice. Moreover, whether relying on accounting returns (ROA) or market returns (returns on common stock), there is no evidence that repricing firms perform better after the repricing.

Practical implications

Provides boards and senior managers with information with information showing that repricing of options is almost never justified except possibly when hiring a new CEO.

Originality/value

Of particular value to CEOs and other board members

Citation

Dalton, D.R. and Dalton, C.M. (2005), "On the decision to reprice stock options: almost never", Journal of Business Strategy, Vol. 26 No. 3, pp. 8-9. https://doi.org/10.1108/02756660510597047