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Out of the Hole?

Some people do get all the breaks, but that's no way to run your stock options.

What can you do when your company's shares perform so poorly that owning options on them is dragging your employees into the hole? Some companies are canceling exercised options to save staff from heavy financial losses and the stinging tax bite.

Trouble is, these companies often extend the offer to senior staffers only, a practice that risks undermining morale among the rank and file. "If you don't offer stock option rescissions to all employees, you can end up with everyone hating you," says Alan Johnson, a New York City compensation consultant. One way to avoid that is to package rescissions so everyone appears to win, even if some winnings are bigger than others. Senior management might trade old options for new in a one-for-one swap, while lower-level staff get a two-for-one rate.

Most experts dismiss rescissions as unfair and risky to companies' long-term health. External shareholders won't be happy, for one thing. They won't get the stock break, and rescissions are a financial drag diverting money from other needs such as research and development. Companies that offer rescissions also lose options-based tax deductions.

Clearly, rescission puts you between a rock and a hard place. No one wants to see options-burdened executives who can't pay their rent. But bailouts establish a bad precedent by letting officers off the hook from their responsibilities. Says J. Richard, a compensation expert in Half Moon Bay, California, "Rescission takes too much of the risk from people who should be taking all the risk."

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This article was originally published in the August 2001 print edition of Entrepreneur with the headline: Out of the Hole?.

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