Options under water at 34 pct of Fortune 500 -study

By Martha Graybow

NEW YORK, Feb 12 (Reuters) - Tumbling share prices have left many executives, as well as rank-and-file employees, at big U.S. companies sitting on piles of stock options that are currently worthless, a new study has found.

Stock options are "under water" -- meaning the current price of the stock has sunk below the exercise price of the options -- at 34 percent of the corporations in the Fortune 500, according to the study from executive compensation consulting firm Steven Hall & Partners.

Pearl Meyer, the consulting firm's senior managing director, said the situation creates problems for companies in hard-hit sectors such as financials, retail, home building, pharmaceuticals, automobiles and airlines that have used stock options as a compensation and retention tool for employees.

Based on closing share prices as of Friday, the Fortune 500 company hardest hit in terms of underwater options was Beazer Homes USA Inc (BZH.N), whose share price of $7.74 was 82 percent below the average exercise price of the more than 2.1 million stock options currently outstanding.

The study compared weighted average exercise prices for outstanding options disclosed in a company's most recently filed annual report and Friday's stock price.

The nine other companies whose options were found to be most underwater were Tenet Healthcare Corp (THC.N), Unisys Corp (UIS.N), Charter Communications Inc CHTR.O, Countrywide Financial Corp CFC.N, Circuit City Stores Inc CC.N, Sanmina-SCI Corp (SANM.O), Blockbuster Inc (BBI.N), Micron Technology Inc (MU.N) and Ford Motor Co (F.N).

Many companies "have senior executives and, in some cases, all employees whose grants over a number of years are all of a sudden worthless," Meyer said. She said similar declines were seen during the Internet stock crash early this decade, but the problems then were more confined to the technology sector.

"This is more broadly based than a few industries," Meyer said.

The Standard & Poor's 500 .SPX index is down about 12 percent since October.

When options are under water, companies risk the loss of talented executives who may be tempted to jump ship to other firms that entice them with the promise of new options priced at the market's current low stock prices, Meyer said.

But if companies try to keep current employees happy by giving out new options, they risk angering their shareholders, who also have been hurt by the market slide, she said.

Companies typically must get shareholder approval before repricing options, and while they can give out additional option awards, such a move dilutes the number of shares outstanding and results in an accounting charge that hurts earnings.

Meyer said companies struggling with underwater options can take steps to help out employees such as doling out restricted stock, as long as the firms have the shares on hand to distribute. Another option, she said, is to provide compensation through cash incentive plans.

Still, not all option holders are suffering. The 10 companies whose options were most "in the money" -- when the option has value and can be sold or exercised for a profit -- were Peabody Energy Corp (BTU.N), Allegheny Technologies Inc (ATI.N), GameStop Corp (GME.N), Mosaic Co (MOS.N), AK Steel Holding Corp (AKS.N), Chesapeake Energy Corp (CHK.N), Monsanto Co (MON.N), Reynolds American Inc (RAI.N), Cummins (CMI.N) and Amazon.com (AMZN.O), the study found. (Editing by Tim Dobbyn)