• The Wall Street Journal, Monday, November 10, 2008 11:15 AM

As the NASDAQ plummets, technology companies are increasingly drowning in "underwater" options, The Wall Street Journal reports. Employees at dozens of companies like Google and Yahoo are anxiously holding onto stock options, which grant the right to buy company shares at a preset price, because those shares have fallen way below the exercise price. At some companies, like AMD, whose share price has fallen 76% in the last year, the situation has gotten so dire that the company is now asking shareholders for permission to reprice 99% of its outstanding options. However, shareholders are worried that resetting options will only water down the share price further.

So-called underwater options are a mounting problem for Silicon Valley companies. "The vast majority of the historically granted stock options no longer are effective as incentives to motivate and retain employees," AMD said in a company proxy statement. "For investors, the wound is deep and the wound is recent," said Pat McGurn, special counsel at shareholder advisory firm RiskMetrics Group. "I don't think there is a lot of [shareholder] sympathy for broad-based repricing."

Stock options are an integral part of luring top talent to a company. However, the strategy only works well when share prices are rising, because when share prices fall, company executives start thinking they're underpaid. Shareholders, meanwhile, are reluctant to allow companies to reprice options because the stock given to employees only dilutes their holdings.

Read the whole story at The Wall Street Journal »