Intel's Option Plan: Only Half Right

Considering the way some companies have handled their stock options' slide underwater, it's easy to agree with my colleague Anders Bylund that Intel (Nasdaq: INTC  ) chose the right plan to reprice its options. Intel will exclude top management from participating in the repricing, and also use a value-for-value exchange program that tends to be more shareholder-friendly. But for all its apparent benefits, Intel's plan isn't quite as great as it may first appear.

All the cool kids are repricing
Normally, repricing stock options is only slightly different from the backdating schemes that were prevalent a few years ago. In those cases, companies ranging from Apple (Nasdaq: AAPL  ) to UnitedHealth (NYSE: UNH  ) changed the dates on previously issued options to set their prices at earlier low points, ensuring that optionholders received greater potential profit. This practice was unfair to shareholders, who often didn't have the benefit of going back and changing the dates on which they bought their own shares. Some instances were so egregious that the associated executives went to jail, including ex-CEO Gregory Reyes of Brocade Communications (Nasdaq: BRCD  ) .

But companies have learned from those days. Now it's all the rage to reprice options, since the process is far more aboveboard. Companies must announce their intention to do so with the SEC beforehand, and get permission from shareholders -- no more smoke-filled backroom deals with directors. The whole process looks all the more palatable because it's done in the light of day.

Yet looks can be deceiving. Repriced stock options receive special accounting treatment under SEC rules. Companies must use an options pricing model to determine a compensation expense that's equivalent to the value of repriced options, minus the value of options replaced. This expense is recorded over the remaining life of the repriced options. So while executives and participating employees are enjoying the benefits of higher future share prices, the company and outside shareholders suffer from the impact of reduced earnings.

However, by using a value-for-value exchange, as Intel is doing, the hit to earnings and shareholders is negligible.

What Intel's approach gets wrong
So what makes Intel's repricing scheme only half right? For one thing, Chairman Craig Barrett defends the plan by suggesting he's trying to keep interests aligned between employees and shareholders. "I assume that shareholders are interested in all employees not only sharing in the success of the company, but also working for the long-term success of the shareholders," Barrett said.

True -- except that was the purpose of the options that Intel originally issued, too. Barrett is essentially granting employees a mulligan. Though options are repriced equal to the fair value of previously issued ones, the likelihood that employees will exercise those options in the future has now increased, thanks to their new and more appealing prices. In the end, Intel's shareholders are left holding a lighter bag of depressed share values.

Google (Nasdaq: GOOG  ) became officially evil when it went this route of guaranteeing option success. A number of other companies, such as Aladdin Knowledge Systems (Nasdaq: ALDN  ) , have also rubbed this genie's lamp to get their option wishes granted.

Intel's choice of a less offensive method doesn't change the essential wrongness of repricing options in the first place. The lesser of two evils is still evil.

Intel and UnitedHealth Group are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers pick. Apple and UnitedHealth are Motley Fool Stock Advisor recommendations. The Fool owns shares of Intel and UnitedHealth. It also owns covered calls of Intel.

Fool contributor Rich Duprey owns shares of Intel, but he does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool's disclosure policy always plays fair.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 25, 2009, at 6:14 PM, RobertKW wrote:

    This article shows the ignorance of those who have never worked for an employer who utilizes stock options to motivate and retain employees. As a >28 year former Intel employee I can tell you with confidence that Intel stock holders are getting a tremendous value in terms of employee extra effort, energy and experience retained by the company motivated by the relatively modest cost of resetting employee stock option prices to keep them from going 'under water'. When the economy crashes and drags down the stock it is (unlike AIG) not the fault of employees. These employees are needed to keep working long and hard to insure that the company and its stock value are positioned for recovery when the economy recovers.

  • Report this Comment On March 25, 2009, at 6:22 PM, drborst wrote:

    O.K., half right is you look at shareholder interest only.

    My neighbor works at Intel, and she has options granted in 2001 with a strike price of ~$30/share. They've never been in the money. In two years they expire and she gets nothing (Unless Intel more than doubles in the next two years).

    But Intel recorded those options as an expense (well not the ones in 2001, but I'm sure there are some post 2006 that are also underwater). As a shareholder, do I like the fact that Intel recorded an expense and that money simply vanished?

    If I read the program correctly, the replacement options vest over a few years and expire later. My neighbor will be less likely to leave Intel when things turn around and companies that want her skills start hiring, sparing the company the expense of hiring and training a replacement, which I as a shareholder appreciate.

  • Report this Comment On March 26, 2009, at 9:19 AM, iviewit wrote:

    Perhaps the sell off of stock by top IBM execs and the layoffs are the result of a Trillion dollar lawsuit IBM is named in. Check it out below, wonder if shareholders know, also Intel named. A SEC complaint has been filed against Intel for failure to notify shareholders of liability @ http://www.iviewit.tv/CompanyDocs/20090325%20FINAL%20Intel%2...

    MADOFF + STANFORD + DREIER + SATYAM + ALBERT HU = PROSKAUER ROSE

    Investors who have been burned in these scams should start to seek redress from the lawyers who were involved with these scams. I personally have been trying to notify regulators and authorities of a ONE TRILLION DOLLAR scam that is putting states like New York and Florida at huge risk, as well as, companies like Intel, Lockheed, SGI and IBM. The states and companies involved in the fraud fail to acknowledge the risk exposing shareholders and citizens to impending liabilities. Investigators, courts and federal agents ignoring the crimes and evidence, including a car-bombing attempt on my life. I know how Harry Markopolos felt trying to expose Madoff in a world without regulation.

    Did I hear Proskauer Rose is involved in Madoff (involved many clients too) and acted as Allen Stanford's attorney. Investors who lost money in these scams should start looking at the law firm Proskauer's assets for recovery. First, Proskauer partner Gregg Mashberg claims Madoff is a financial 9/11 for their clients, if they directed you to Madoff sue them. Then, Proskauer partner Thomas Sjoblom former enforcement dude for SEC and Allen Stanford attorney, declares PARTY IS OVER to Stanford employees and advises them to PRAY, this two days before SEC hearings. Then at hearings, he lies with Holt to SEC saying she only prepared with him but fails to mention Miami meeting at airport hanger. Then Sjoblom resigns after SEC begins investigation and sends note to SEC disaffirming all statements made by him and Proskauer, his butt on fire. If you were burned in Stanford sue Proskauer.

    Proskauer Rose and Foley & Lardner are also in a TRILLION dollar FEDERAL LAWSUIT legally related to a WHISTLEBLOWER CASE also in FEDERAL COURT. Marc S. Dreier, brought in through Raymond A. Joao of Meltzer Lippe after putting 90+ patents of mine in his own name, is also a defendant in the Federal Case.

    The Trillion Dollar suit according to Judge Shira Scheindlin is one of PATENT THEFT, MURDER & A CAR BOMBING. For graphics on the car bombing visit www.iviewit.tv.

    The Federal Court cases

    United States Court of Appeals for the Second Circuit Docket 08-4873-cv - Bernstein, et al. v Appellate Division First Department Disciplinary Committee, et al. - TRILLION DOLLAR LAWSUIT

    Cases @ US District Court - Southern District NY

    (07cv09599) Anderson v The State of New York, et al. - WHISTLEBLOWER LAWSUIT

    (07cv11196) Bernstein, et al. v Appellate Division First Department Disciplinary Committee, et al.

    (07cv11612) Esposito v The State of New York, et al.,

    (08cv00526) Capogrosso v New York State Commission on Judicial Conduct, et al.,

    (08cv02391) McKeown v The State of New York, et al.,

    (08cv02852) Galison v The State of New York, et al.,

    (08cv03305) Carvel v The State of New York, et al., and,

    (08cv4053) Gizella Weisshaus v The State of New York, et al.

    (08cv4438) Suzanne McCormick v The State of New York, et al.

    John L. Petrec-Tolino v. The State of New York -

  • Report this Comment On March 26, 2009, at 2:15 PM, Catinthehat45 wrote:

    Same old worthless ranting and raving over worthless accounting for stock options from the Motley Fool. GUESS WHAT? the best companies like GOOG and AAPL are utilizing options in the traditional way. The deadwood companies like Microsoft decided they didn't need options anymore and died as companies as a result. Meanwhile Motley Fool keeps making hay about it, as if phantom expenses really matter. If option expenses matter GOOG and AAPL would not rally and yet they do- because of the inherent company growth generated by stock options in the first place.

    BTW there has been no jailtime for any options convictions of any kind. The few that were not acquitted were early on and those people are up for appeal.

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