Dell employees grumble about buyout as stock options are drowned

Many stock-owning employees will be left with less than they had hoped for.

by Sean Gallagher- Feb 13 2013, 12:45pm EST

Dell corporate offices in Round Rock, Texas.

While Dell CEO Michael Dell and many at the top of the Dell executive ladder stand to make out well in a move to take the company private, some rank-and-file employees and mid-level executives are grumbling about how the deal affects them. That's because Dell, which has used stock options and restricted stock heavily as an incentive for employees in the past, is simply cancelling many of the stock options it has awarded to employees if the go-private deal is completed.

In an internal e-mail to employees obtained by Ars Technica, the company announced pending changes to its Long Term Incentive (LTI) program. Dell plans to pay out the difference between the exercise price of options and the $13.65-per-share go-private price to employees whose options were "in the money"—with exercise prices below $13.65 per share. But options that are "underwater"—issued when Dell's stock price was above $13.65—will simply be cancelled.

"Upon closing of this proposed transaction, which is subject to shareholder approval and other customary closing conditions, Dell will be owned by Michael and Silver Lake, and shares of Dell will no longer be traded publicly," the e-mail to employees said. While the company will "continue to offer market-competitive compensation," the change means that Dell's previously stock-heavy incentives for employees will have to be converted to something else. And that means employees who hold a stake in the company right now—or the promise of one—will be left with significantly less than they may have hoped for.

That's part of a continuing theme for Dell employees who had bought into the promise of working for a publicly traded company. In October, Dell forced some employees who had heavily invested in Dell stock as part of their 401k plans to sell off that stock at $9 a share—a move based on a policy change.

Playing the option

The use of stock options by corporations to reward employees—and executives in particular—has long been controversial. Michael Dell and other corporate executives made millions off of stock options in the 1990s and the first half of the last decade—in part because of long-running accounting fraud that covered up kickbacks from Intel for exclusively using its processors.

But as the company has used stock and cash to acquire other companies to create its software and enterprise services businesses over the past six years, many of those employees who came onboard in the process have ended up with stock options they couldn't use—because they were issued when Dell's stock was high but vested after the stock had descended. And as Dell moves to go private, those who held on to "underwater" options in the hopes of a better future are cut out of the deal.

Enlarge / For employees who got performance options when the company's stock was over $13.65, those options get converted to a hearty handshake.

And those options aren't insignificant. In 2009, Dell took an expense of $106 million to accelerate the vesting of stock options it had given to employees that were underwater—options for 20.9 million shares that had been issued to employees with an average exercise price of $22.03 a share. If they had been exercised, they would have amounted to more than 1 percent of Dell's outstanding shares—shares Dell would have had to buy back from investors to award to employees.

Dell employees who were awarded Restricted Stock Units (RSUs) as part of their compensation will get some cash out of the buyout—but probably not what they had expected. RSUs will be converted to cash if the deal goes through, but they will still be locked into Dell's vesting plan. That means that in five years, if Dell goes public again at a higher stock value, those who had RSUs will still just get paid out at $13.65 per share.

When asked about the changes, a Dell spokesman referred to the company's SEC filings, in which it said details on new long-term incentive programs and other compensation would be finalized after the deal is complete. "Our intent is for all of our team members to feel that the new program is equal to or better than the prior programs," Dell said in its public message to "team members."

Sean Gallagher / Sean is Ars Technica's IT Editor. A former Navy officer, systems administrator, and network systems integrator with 20 years of IT journalism experience, he lives and works in Baltimore, Maryland.