“Compensation consultants have estimated the costs of turnover—which include termination costs, vacancy costs until a job is filled, costs of hiring and training a replacement, and lost productivity with a new employee—at 50% to 200% of an employee’s annual salary.”So despite the controversy, repricing underwater options may in fact conserve funds by giving employees a stake in their current company.

Carter’s paper notes, for example, that one study found “…positive and significant stock returns surrounding repricing announcements in Canada that seem to be motivated by the desire to restore incentives and retain employees.” In other words, when everyone gets a corporate life jacket, more employees tend to stay on board and the company’s bottom line may be revitalized.

“But I think the findings are still valid for two reasons.

First, it may be even more important to retain good employees when the economy is bad since they are the ones that will help the firm get through it.

Meanwhile, if new rules proposed by the New York Stock Exchange (NYSE) and under consideration by the Securities and Exchange Commission (SEC) are adopted, those companies might have to do a bit more explaining to their shareholders.

Submitted in October 2002, the NYSE’s “Notice of Filing of Proposed Rule Change by the New York Stock Exchange, Inc.

When the stock price of Brocade Communications Systems, a fast-growing publicly held computer networking equipment maker based in San Jose, Calif., skidded in late 2002, the pain was widespread. Like a significant number of other companies in similar situations, Brocade protected one class of investors – employees with stock options whose strike, or exercise price, had fallen below the market value – by simply issuing new stock options at the market price, effectively and Luann J.

Lynch, a professor at the Darden Graduate School of Business, examines the relationship between repricing underwater stock options and retaining employees.

Companies, however, characterize such action as an investment in the long-term health of the enterprise, saying repricing is necessary to retain talented employees during lean times.

According to recent surveys, turnover is expensive for firms, says Carter.

J., also thinks that repricing could take a beating if it’s put to a shareholder vote.