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EDITOR’S TAKE: The insidious impact of underwater stock options

Even if banks’ share prices were miraculously back up at the highs of early 2007, the sorry state of revenues means they wouldn’t exactly be doing a lot of hiring at the moment. But, with the stock of most large institutions a 10-year low, what little recruitment might otherwise have taken place in the current conditions is being discouraged. This is because with stock options underwater, no one can afford to move on.

Banks’ HR people say underwater stock options are significantly depressing staff turnover. “If you move to another organisation and your options are underwater, you won’t get any recompense for them,” says the head of recruitment at one firm. “It’s definitely a factor that people consider when deciding whether to leave.”

In any normal market, banks would expect at least 20% of their staff to voluntarily leave in search of a new job. In hot areas, when guaranteed bonuses are on offer, this can rise to as high as 30%.

In the current market, however, not only are bankers unwilling or unable to find new jobs, many are also unwilling or unable to retire. Plummeting stock prices and underwater options mean many of those who might otherwise have decided to get out when things turned nasty suddenly can’t afford to do so.

As a result, we have a market in which there are not only very few net additions to headcount, but limited replacement hiring.

Net hiring will only resume when revenues come back and former brokerage firms establish a new business model.

Replacement hiring will only resume when bankers are willing to leave their jobs voluntarily. If stock options are not to act as a brake on this impulse, share prices will either have to rise to meet the option strike price, or sink so low that there is no hope of recovery. As the data below shows, we are nearer the second situation than the first.

Underwater options by bank*

1. Citigroup: 74% underwater.
Weighted average strike price at end of December 2007: $43.08; current share price: $11.21.

2. Merrill Lynch: 71% underwater.
Weighted average strike price at end of December 2007: $54; current share price: $15.51.

3. Morgan Stanley: 70% underwater.
Weighted average strike price at the end of 2007: $48.22; current share price: $14.58.

4. UBS: 60% underwater.
Weighted average strike price at end of fiscal 2007: CHF42; current share price: CHF16.77.

5. Credit Suisse: 47% underwater.
Weighted average strike price at end of fiscal 2007: CHF68.1; current share price: CHF35.92.

6. Deutsche Bank: 46% underwater.
Weighted average strike price at end of fiscal 2007: €53.32; current share price: €28.64.

7. Goldman Sachs: 33% underwater.
Weighted average strike price at end of December 2007: $106.63; current share price: $71.21.

8. JPMorgan: 18% underwater.
Weighted average grant price (based on RSUs) at end of fiscal 2007: $43.11; current share price: $36.41.

*Stock prices at 12pm GMT 11 November

Comments (2)

Comments
  1. This sounds like a weak pre-text to slashing performance targets and rewarding failure. Underwater options are no disincentive to moving on. Leave and you get nothing, but stay and you get nothing either. Ergo, you take advantage of any opportunity to improve your other forms of compensation, benefits, or (God forbid) quality of work and life.

  2. I agree with J, I have never known a candidate reject a serious offer because of the stock options. As options are normally structured to ensure you can never realise the full allocation if you leave – they’re effectively rolling golden handcuffs – but not so golden any more…

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