The decline in the stock market has meant many companies have lost the retention and incentive effects of stock options for employees. If employees don't expect the price of the stock to ever rise above the options' exercise price, then these underwater options have little value.
Some public companies have implemented various option-exchange programs to address this problem. These include issuing additional options with a lower exercise price, cashing out underwater options, replacing options with restricted stock or new options, and amending option terms to a lower exercise price.
These programs, however, present potential pitfalls. Many shareholders of public companies, including large institutional investors, regard such programs unfavorably, arguing that employees should not be rewarded for poor performance at the expense of shareholders. Although most states' corporate laws do not require shareholder approval for these steps, institutional investors frequently demand
