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A Funny Story About Stock Splits and Options
By JLP | July 25, 2007
I was just reading a post over on GenXFinance about stock splits. Jeremy’s post reminded me of something that happened several years ago. My wife’s employer had given their employees some stock options with an exercise price of around $70 per share (I don’t remember the exact amount). At the time, the company’s stock was trading at around $50 per share. As time went on, the stock moved toward the exercise price and as it got closer my wife heard some employees talking about it. One of the employees said:
“You watch. Once the stock price gets close enough to the strike price, they’ll split the stock 2-for-1 so that we won’t be able to exercise our options.”
LOL! Fortunately, that’s not the way it works. With a 2-for-1 stock split, the exercise price would adjust for the split. So, on a 2-for-1 split, if the strike price was $70 before, it would become $35 after. In other words, the guy was worrying about nothing.
Topics: Investing | 2 Comments »
July 26th, 2007 at 3:04 pm
That’s an example of wasted compensation for that guy. The company shells out money for options in order to create a long term incentive for this guy to work for the company, however all it succeeded in doing was building suspicion against the company.
The HR people at your wife’s company may want to start an education campaign to explain how the options work. It is the same in my company: we get share discount shares, and sometimes we get options and share grants. However some employees consider them to be like cash and just sell them as soon as they vest. As well, since at the time of grant they are out of the money, they are considered by some employees to be fake in some way; a little like your wife’s coworker. It has the opposite effect and it’s wasted.
July 28th, 2007 at 11:28 am
ok that is funny! Sounds like he buys into the conspiracy theory huh.