Underwater Options In An ASX Listed Company

Employee Share Option Schemes (ESOPs) are an effective way of incentivising directors and employees. They provide them with a sense of ownership in the business and allow them an opportunity to share in the successes of the business.

The incentive will to a large extent be lost, however, if the value of the underlying security (usually an ordinary share in the issued capital of the employer, or its parent) is less than the relevant exercise price. Such options are generally referred to as "Underwater" or "Out of the money".

Many ASX listed employers are finding themselves caught in deep water when it comes to their ESOPs following the volatility of the Australian stock markets which has caused major stock indices to fall by as much as 20% since January this year.