Another thing to keep in mind: repricing is generally a North American phenomenon. The overwhelming majority of the small number of repricing proposals we observed in 2022 were in the United States and Canada. Moreover, some U.S. boards can approve a repricing of options without shareholder approval, provided the equity compensation plan governing the awards to be repriced permits it.
Why Do Companies Reprice Options?
Some would argue that for a company facing a macro downturn, repricing represents the “least bad” option for keeping employees incentivized, particularly when it is conducted on a net neutral, fair value basis. When retention is crucial, a misalignment of employee and shareholder experience may be less of a concern than watching talent cross the street to take new sign-on awards from a competitor. As smaller companies are behind the bulk of repricing action, this may be a story of David versus Goliath in the highly competitive market for talent.
But the optics of bailing out well-paid executives obviously aren’t great – particularly when the economy is down, shareholders out of pocket and employees laid off – so public companies need to be thoughtful about how they are going to do this, if at all.
What it May Mean for Proxy Season 2023
The spring of 2022 already saw the start of a decline from the market’s 2021 peaks, due to a convergence of macroeconomic shocks and rising inflation and interest rates. However, last year’s shareholder voting results (and voting agenda) were on a lag — due to the retrospective nature of typical “say-on-pay” votes, in most cases shareholders were expressing an opinion on pay for surging 2021 performance.
In 2023, investors will generally be looking back on the first protracted downturn in a decade. In some cases, repricing may be one of the factors they will need to consider – whether voting directly on a repricing proposal, or in considering say on pay votes (or even the re-election of specific directors) where boards with the requisite authority unilaterally repriced or exchanged options in 2022.
