Underwater stocks and how to communicate with staff at a time of economic turbulence

The stock market fluctuations seen since the recent US presidential election underscore the reality that in 2025 we find ourselves living in an uncertain world. With no indication that stability will return in the near future this has consequences across the board, including for companies that offer equity compensation awards to their employees.

Stock plan admins, HR and Compensation & Benefits professionals may find themselves wondering how to manage equity plans in a period defined by volatility or economic unrest? How do you encourage participation at a time when employees might feel less confident about the benefits of stock plans? How do you communicate with employees who may be concerned about their equity awards? How do you continue to motivate staff at a time when that price is falling or is worth less than the predetermined strike price?

While there is no one-size-fits-all solution there are some common approaches that can be taken as you navigate these turbulent times.

What are underwater options?

Stock options give the holder the opportunity to exercise,  i.e., purchase, company shares at a specified future date for a pre-set price. The hope is that the value of the company’s stock will increase over this time, but there is no guarantee that this will happen, especially during times of market volatility.  When the exercise price is higher than the current market price, i.e. it costs more to buy at the pre-agreed price then the stock is said to be underwater.

How options can play out

Example 1:

Say your company’s stock price is currently $5 per share. Under the rules of your plan in three years’ time, at vest, employees can buy these shares for $4.

The hope, for employees, will be that the stock price will rise over that three year period, to say $7, which could mean when the time comes they can buy the stocks at the agreed price of $4. If they then sell the stocks immediately they make a profit of $3, i.e. the difference between the $4 cost price for employees and the $7 current market value.

This is of course a very simplified example and does not take into account taxation and other factors.

Underwater shares are where the current price is below the agreed price.

Example 2:

Your company’s stock price is currently $5 per share. Under the rules of your plan in three years’ time, at vest, employees can buy these shares for $4.

At vest however say the shares are worth $3. So, rather than saving your employees money it would actually cost them $1 more to purchase the shares under the terms of the plan.

How can companies respond when options are underwater?

Reprice underwater options: With this approach, the company effectively replaces the underwater options with new options, with the exercise price set to the then current market value. While this may prove popular with employees holding options that have lost their value, ordinary investors may be less impressed if they believe that employees have been treated more favorably. Companies will usually be aware of this potential downside and might move to ease concerns by also making other changes, such as altering the vesting procedure and expiration date – the how and when of eventually exercising the options.

It is also important to note that repricing options can come with a cost attached, and so may not always be attractive to companies. Depending upon the circumstances, there may be accounting, legal and consulting fees involved, while it is also possible that the stock market might react negatively, leading to a decline in the company’s stock price.

Option exchange: Another possible solution is to allow employees to exchange underwater options for another form of equity. In practice, this would mean canceling the existing options and granting the employee a fresh award, such as restricted stock or restricted stock units (RSUs). In this instance they will usually receive fewer shares. It’s also important to note that an option exchange may trigger US tender offer rules, so be sure to seek advice from a qualified professional before progressing.

Communication is key

Arguably as important as any action you take is how you communicate about the situation with your employees. Communication will be important even when everything is running smoothly, but it becomes even more so at times of market turbulence. Being clear and transparent can often generate a positive reaction among employees seeking answers and clarity.

Employee equity compensation is by its nature complicated, but the positives of having a plan can make the effort worthwhile. However, you should always look to make it clear that there are no guarantees when it comes to market performance and education should be a part of your equity compensation conversation from the outset.

More broadly, regular updates are a key feature of an effective communications strategy. Failing to keep your people in the loop can create an information vacuum, and that space can be filled by speculation and unfounded rumors, the net effect of which can be to impact negatively on morale.

Also:  

• Letting employees know about courses of actions being considered, e.g., repricing, exchanges.
• Provide a platform for employees to raise their concerns, i.e., being seen to encourage two-way communication.
• General reassurance, i.e., emphasize the company’s ongoing commitment to its people and point to other aspects of overall compensation that provide value.

What next?

At J.P. Morgan Workplace solutions we provide employee equity management solutions for businesses of all sizes the world over. You not only get the benefit of our all-in-one automated platform to handle the day-to-day administration, but you also get access to a robust team of equity specialists and support team who can work with you to develop an employee stock option plan designed to meet your needs.

Contact us today.