As of October 17, 2008, 68 percent of Fortune 500 companies had outstanding employee stock options with a weighted average exercise price higher than their closing stock price that day. The reality? A large percentage of employee stock options are likely underwater.
In 2007, only 32 percent of Fortune 500 companies had outstanding employee stock options with a weighted average exercise price higher than their closing stock price that day, according to research by Equilar, an executive compensation research firm and data provider.
A staggering 90 percent of Fortune 500 CEOs held underwater stock options as of October 17, 2008. Up a substantial amount since 2007, where 61 percent of Fortune 500 CEOs held underwater stock options.
Although option exchange programs remain relatively low in number, many more companies are beginning to seriously explore the possibility of dealing with underwater options through the use of an option exchange.
During the fourth quarter in 2008, Equilar found that there are more completed, active, and proposed option exchange programs than in any other previous quarter in 2008.
Equilar believes that there will be a significant increase in the number of option exchange programs if current market conditions persist.
Thirty-five companies have completed or proposed option exchanges in 2008, residing primarily in the home building, services, and technology sectors. Companies with revenues over $1 billion that have exchanged options in 2008 include Toll Brothers, MGM Mirage, Isle of Capri Casinos Inc., UTStarcom Inc., VMware Inc., R.H. Donnelley, Builders FirstSource Inc., and MDC Holdings Inc. In addition, Beazer Homes USA Inc. and AMD have disclosed a proposal to exchange options.