The significant declines in share prices at many of the big financial companies have left executives and employees in an unenviable position: many hold options that are badly out of the money (subscription required) and, at companies like The Bear Stearns Companies, Inc. (NYSE: BSC), have literally no chance of ever realizing any value.

Executive pay consulting firm Steven Hall & Partners reports that 55% of Fortune 500 financial services and insurance companies have options with an average strike price that puts them underwater. At Countrywide Financial Corporation (NYSE: CFC), the current share price is about 86% lower than the weighted average strike price of the options held by employees.

All of this presents an interesting executive compensation quandary: the purpose of options is to give executives an incentive that allows them to profit alongside shareholders. But options that are so out of the money as to be hopeless accomplish nothing. What effect might this have on performance? Activist investor Daniel Loeb opined on this very issue in a letter to Star Gas Partners CEO Irik Sevin back in 2005:
Irik, at this point, the junior subordinated units that you hold are completely out of the money and hold little potential for receiving any future value. It seems that Star Gas can only serve as your personal "honey pot" from which to extract salary for yourself and family members, fees for your cronies and to insulate you from the numerous lawsuits that you personally face due to your prior alleged fabrications, misstatements and broken promises.

I worry that a similar situation may be developing at some of the financial companies. But the question is, with an ode to Lenin, "What is to be done?" Repricing the options -- lowering the strike price -- hardly seems fair. Why should executives be allowed to profit from a stock's move from $5 to $10 when they were responsible for its plummet from $50 to $5?

Citing a 2004 study, the MIT Sloan Management Review wrote that "Repricing underwater stock options won't help you hold onto top executives, but it can reduce turnover among lower-level employees."

That seems like an ideal solution. Rank-and-file foot soldiers shouldn't be penalized for disastrous managerial decisions they had no role in and CEOs shouldn't be rewarded for stupid risks with options repricing. Sure: it would result in a hit to earnings and probably some grumbling from the street, but would do wonders for employee morale, which is key to a successful turnaround.