Software maker Inktomi (INKT) is joining a growing list of firms embarking on a new variation of "never-mind-those" accounting in an effort to bring employee stock options back above water.
The Foster City, Calif., company, whose shares soared to a high of $241 last April and closed at $6.43 Monday, has offered its employees and executives the opportunity to exchange their options for new options. The new strike price: wherever the company's stock is trading six months and one day from the date the employee turns in the old options.
"The strength of this company is its intellectual capital," says Steve Diamond, Inktomi's director of corporate communications. "We've incentivized employees heavily based on stock."
But that idea is drawing criticism from some who argue that it's still an options repricing, which most shareholders despise because it basically rewards employees for a falling stock price. And like any options plan, it could dilute shareholder value. This particular plan also could create a counterintuitive incentive for employees to hope their company's share price falls, at least in the short term.
Follow the Leader
Inktomi is following in the footsteps of firms like
with the maneuver, which Inktomi disclosed in a 10-Q filing with the
Securities and Exchange Commission
last month. Inktomi hopes the arrangement will placate existing employees whose options became worthless after the tech market collapse over the past year.
But repricing of options has become a sensitive subject in recent months, for a few reasons.
First, an interpretation of accounting rules approved last year by the
Financial Accounting Standards Board
-- which sets accounting standards -- discourages stock option repricings by forcing companies that set a new value for options to take a charge to earnings. But the accounting penalty only applies if a company issues lower-priced replacement stock options within six months after the initial options are canceled.
Hence the beauty, or cunning, of the Inktomi and Sprint plans.
"Really this is just repricing, with a time lag," says Corey Rosen, executive director of the
National Center for Employee Ownership
, an Oakland, Calif., nonprofit that monitors stock options issues.
Second, there's been a movement, led in part by the now-retired SEC chairman, Arthur Levitt, to force companies to seek
shareholder approval for employee stock options plans. The concern Levitt and others, including some institutional investors, have raised is that stock options plans can dilute the overall value of shares. Options generally are priced well below the market, and the fear is the market value of the shares will decline when employees exercise them.
Inktomi reported that as of Feb. 12, it had 18.8 million outstanding unexercised options shares that it had awarded to employees at prices above $14.56 a share (the closing price that day). That included 6 million shares at an average exercise price of $33.90 per share and 3.2 million shares at $17.88 a share.
Finally, repricings generally have drawn fire for rewarding employees for a company's falling stock price.
If Inktomi employees took advantage of the company's new plan today they could dump all of those options in exchange for the same number priced at whatever the trading price is six months and a day from now.
Linda Griffey, a lawyer at
O'Melveny & Meyers
in Los Angeles who specializes in compensation issues, says these plans are troubling. "It's something that companies should think long and hard about doing because it may not be in the interest of shareholders," she says. "In most situations, shareholders are not going to be happy with this."
Hoping for a Fall?
Aside from the dilution issues, the type of arrangement Inktomi put in place creates a curiously contradictory incentive for workers. On the one hand, it's clearly in the interest of an employee who takes advantage of the new option plan for the company's stock price to remain at least unchanged, or better yet, drop, by the time six months and a day arrives. On the other hand, it's just as clearly in the interest of such employees for the stock price to climb in the long term.
"It's kind of a, I guess you would say, perverse incentive," Griffey says.
Rosen says any implication such a plan might drive employees to underperform in order to keep the stock price down just long enough for new options awards to take effect is unrealistic, particularly when it comes to rank-and-file workers like software engineers.
"What are you going to do? Are you going to withhold the code that you are writing?" he says.
But Rosen also says he believes the most equitable stock options arrangement is to give employees options that vest every six months or year, and then stick with the options price.
"It's more predictable for the shareholders, and the employees," he says. "To me this is a sensible way that these issues should be dealt with."