Executive Stock Option Repricing: Retention and Performance Reconsidered

The repricing of stock options—resetting option values when the strike price falls below the current trading price of a firm9s stock—is a controversial tactic. Detractors suggest that repricing is tantamount to rewarding the failure of firms9 management to secure a level of stock value that exceeds the strike price of options. The arguments of proponents, however, reflect a common theme—a sentiment routinely expressed in repricing firms9 proxy materials: Repricing facilitates the retention of chief executive officers and top management teams and, derivatively, the financial performance of the firm. An analysis of these diametrically opposed views provides no support for the perspective that repricing facilitates either retention or firm financial performance. In fact, repricing is associated with increased levels of CEO and TMT turnover. Moreover, there is no evidence that repricing is associated with improvement in the financial performance of the firm.