Sprint uses loophole to reward executives

Floyd Norris

Monday, Oct. 23, 2000 | 10:51 a.m.

For many corporate executives, the ability to profit from stock options is viewed as something close to a right.

While options are defended as giving executives and employees who receive them an interest identical to those of shareholders, in the past they have often amounted to a one-way bet:

If the stock went up, the option holder profited along with the shareholder. If the stock went down, the options were repriced at a lower level. The repricing enabled the option holder to profit if the stock rebounded from the depressed level, while a shareholder who bought when the option was first issued might still have a large loss.

The Financial Accounting Standards Board moved to block such repricings when, in late 1998, it ruled that they would not get the favorable accounting treatment normally given to stock options. A company that repriced options would have to record a large expense, depressing reported profits. Normally, companies can issue options without reporting an expense.

Last week Sprint Corp., whose shares closed Friday at $25.75, about one-third the peak they reached a year ago, announced what amounts to a repricing plan -- but one that is clearly aimed at getting around the new accounting rule. The offer is being made to all executives and employees who received options, except members of the Sprint board.

The company said that executives and employees who received Sprint options during the current year would be allowed to cancel those options by Nov. 10. That covers options for 17.8 million shares of Sprint stock, with an average exercise price of $59.15.

Anyone who takes up that offer will receive an identical number of replacement options, with a strike price set at the market price next May 11, exactly six months and one day after the options will have been canceled. That time period was chosen to get around the accounting board rule, which bars favorable accounting if the move was made within six months.

It is likely that the vast majority of option holders will choose to cancel their options, given Sprint's share price, which collapsed along with its planned merger with WorldCom back in July.

The offer also applies to owners of options for Sprint PCS stock, the tracking stock for Sprint's wireless business. It is trading at around $37, compared with the average exercise price of $52.54 on the 14.3 million options that have been issued this year.

In announcing the plan, William T. Esrey, the Sprint chairman, said that the deal was intended to be "a powerful incentive to motivate employees to grow with Sprint." The company said the board had concluded that "existing options no longer have sufficient value to motivate and retain employees in today's tight employment market."

Alice O'Brien, a spokeswoman for Sprint, said that the replacement options, to be issued in May, would come in addition to the normal options to be issued during 2001.

Asked if that amounted to a double issuing of options, she said it did not. "I'm not getting anything extra," she said. "They are just repricing the old options."

Of course, 1,000 options to buy Sprint stock at, say, $25, could prove to be worth a lot more than 1,000 options to buy the stock at $59.15.

Tim Lucas, director of research and technical activities at the accounting standards board, said that he was not aware of any other companies that had used the tactic Sprint is using, but that the board had expected someone would.

He said the board might want to consider "whether a commitment to issue an option should have some effect on the accounting," but he doubted any action would be taken. He noted that "in today's volatile markets, it's not a sure thing" that a company's stock will not surge within a six-month repricing window.

Still, he noted, until May, employees will have interests far out of line with those of the shareholders. "It's an absolutely contrary incentive during the six-month window," he said. "Anything they can do during that six-month period to keep the stock price down is in their interest."