Siebel Systems ( SEBL), known for handing out generous stock options, is offering cash or stock to employees whose options have at least a $40 strike price and are therefore worthless now.

In a filing with the Securities and Exchange Commission late Thursday, the maker of customer-relationship management software said the offer is designed to improve employee morale and better align its compensation programs with its shareholders' interests.

The exchange is expected to result in a $27.5 million cash expense in the third quarter, which ends Sept. 30, and a $36.1 million noncash cost.

Siebel shares have lost about 27% of their value since July 17, when the company announced disappointing second-quarter results and said it would lay off 16% of its staff. And shares are off about 78% from their 52-week high of $38.38. Siebel shares rose 18 cents, or 2.1%, to close Thursday at $8.81. In after-hours trading, shares fell to $8.60.

Siebel's offer to exchange stock options that are under water comes as regulators debate whether companies should be required to expense stock options. Some technology companies such as and Computer Associates have announced their plans to expense options, while others such as Intel have said they will not. If Siebel expensed its options in fiscal-year 2001, its pro forma results would plummet to a loss of $1.02 per share from earnings of 49 cents a share without expensing them, according to an analysis by Friedman Billings Ramsey.

What's in It for Me?

"I think companies across the board are struggling with what to do with an employee base that relies on options" as part of their salary, said Nathan Schneiderman, an analyst at Wedbush Morgan Securities. "The question is what happens if the options that employees were largely working for now really have no potential to give employees upside."

As companies that used stock options to recruit employees during boom times wrestle with that question, Wall Street may be left to wonder how to treat Siebel's latest answer to it.

"I imagine the company is going to try to couch it as a one-time expense," predicted Schneiderman, who has a buy rating on Siebel. But he said he views exchange offer more like a bonus and therefore an operating expense. Schneiderman's firm hasn't done any banking with Siebel.

Siebel already has said it expects to incur a cash charge of between $200 million and $225 million in the third quarter because of its restructuring, including severance related to layoffs.

Under the exchange offer, Siebel will pay employees $1.85 for each option with a strike price of at least $40. If the total due to an employee is under $5,000, Siebel will pay in cash, minus taxes. If the total is $5,000 or more, then Siebel will pay the employee in common stock, determined by dividing the total amount due by the closing price of its shares on Sept. 30, the date on the which the offering is currently set to end.

Employees would receive half of the stock up front and the other half over a period of two to four years, depending on the number of options owned. Options to purchase nearly 32 million shares, or 14% of outstanding options, are eligible for the offer. The company, however, expects to issue only 3.6 million shares, which will have little dilutive effect because it represents less than 1% of outstanding shares.

And how many shares does the company's brash CEO, Tom Siebel, stand to get?

Actually, none. Members of the company's board of directors, including officers who are directors such as Siebel, are not eligible to participate in the offer.

Last year, Siebel received 4 million options with an exercise price of $54, plus nearly 4 million options with an exercise price under $40, according to the company's SEC filings. As of Dec. 31, the chief executive held a total of 45.7 million options, with 23.7 million being exercisable. The filing did not break down the total holdings by exercise price. Siebel exercised 3.1 million options in 2001, worth a total of $174.6 million.