BY DR. DONALD MOINE

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The case I wrote about was XYZ Tech (XYZT), a real $100 billion company whose name I changed to protect confidentiality. In the case study, the stock of XYZT began the year with a value of $60 a share. The case dealt with a hypothetical executive who had fully vested options on 100,000 shares of XYZT that he could exercise to purchase the stock at $50 per share. In the article, I showed how this executive was able to use protective option strategies to preserve almost all of his personal wealth while the vast majority of other employees of XYZT lost virtually all of the value of their hard earned stock options. Tens of thousands of Americans have suffered a similar fate due to the eroding value of their stock options.

The article triggered many readers to write e-mails in which they detailed their own stories of vanishing options wealth. Research shows that nearly $1 trillion in the value of Employee Stock Options (ESOs) and employee owned stock have been destroyed in the past twelve months. What interested me most of all were the "strategies" which some readers said they employed as the price of their company's stock (and the value of their options) melted.

It seems that the most common strategy people employ in the face of rapidly eroding options value is to hope and pray that the value of the company stock somehow recovers to its former highs or at least to a "break-even" value. Hoping and praying for a rising stock price are not very effective strategies except during a rapidly rising bull market. In normal markets, most stocks rise slowly over time and in declining markets, the majority of stocks fall in value. Hoping and praying have little effect on equity values. Unfortunately, none of the people who wrote me worked for companies whose stocks have risen in value. Experience has taught these people that hoping and praying does not work as well as buying protective options to preserve the value of one's stock holdings.

A second popular strategy employees use is to carefully study the predictions and comments of their company's president and senior management. This strategy, while more intellectually rigorous than simply hoping that the company's stock recovers, yields similar results. Many company executives believe one of their job responsibilities is to motivate their employees by putting a positive spin on their company's prospects for future growth. Recently, a famous class action lawyer told me that company executives make statements about future growth and profitability to their employees which they would never dream of making to the public for fear of litigation. Employees who hold ESOs and company stock need to take such positive comments from senior executives with a grain of salt.

I received e-mails from other readers who told me that they relied upon the research reports and recommendations of top stock analysts at major brokerage firms. While analysts' reports can be useful, remember that fewer than one percent of all such reports make "sell" recommendations. By far more common are ratings of "buy" or "strong buy," even on collapsing stocks, due to the fact that analysts know their firm will never get investment banking business from a company they have rated a "sell." Many ESO holders decided not to protect the value of their stock options because well-known analysts were predicting the stock would increase 20 percent or more over the next year. A number of these stocks went on to lose 70 percent to more than 90 percent of their value, revealing that the crystal balls of the analysts were cloudy at best. 

The strategy of studying the comment of stock analysts rarely results in taking action to protect the value of stock options. In fact, some of the companies which have received the most glowing reports from stock analysts have been the ones which have gone on to lose tens of billions of dollars in value, and the employees of those companies have lost tens of millions of dollars (or more) in the value of their unprotected stock options.

The third, saddest and perhaps most realistic strategy which some people employ is to simply give up on their company and to give up on their worthless stock options. They seek employment elsewhere. Executive recruiters, some earning over $1 million a year, thrive on this turmoil. It is often easy to find another company that will offer you a comparable job with a whole new batch of their own stock options. However, if you don't learn how to use protective stock options now, how will you prevent a meltdown in the value of your new options? Also, the cost to companies who lose dozens or even hundreds of key employees due to stock options meltdown is staggering. Protective stock options can help prevent this loss of valued employees.

A strategy which has been receiving a great deal of media attention recently is that of repricing stock options. In repricing options, a company may exchange now worthless $50 stock options with new options which have an exercise price of only $25. The practice of repricing options has come under tremendous criticism by the media and even by the Securities and Exchange Commission. In some cases, lawsuits have been filed to stop or challenge repricings. John Heime, branch chief of the Office of Public Affairs of the SEC, told me that new financial accounting standards will likely have the effect of discouraging option repricing. Even if your company is one of the few that does decide to reprice options, they will probably exchange the old worthless options with a significantly smaller number of new options. You may also have to work for the company months or years longer before these new repriced options can be exercised. Unfortunately, the repricing of options seldom preserves more than half of the net worth you could have preserved in your original stock options if you had used protective option strategies.

Researching and consulting on how to best protect the value of employee stock options is a continual process. I believe, however, that companies can implement educational programs to help their employees preserve the value of their stock options. In turn, these programs will help companies fulfill their fiduciary responsibilities and thus avoid or mitigate multi-million dollar class action lawsuits relating to their employee stock options practices. With over $1 trillion in employee stock options and employee owned stock at risk, we must take all the steps we can to help American workers protect this major source of their net worth.

Dr. Donald Moine is an industrial psychologist specializing in ESO education, wealth preservation, and sales with Association for Human Achievement, Inc. in Palos Verdes, California. Dr. Moine has given seminars and consulted for dozens of major corporations all over the world. He may be reached at DrMoine@aol.com or at (310) 378-2666.