Electronic Arts has come a long way since its founding in 1982 by game pioneer Trip Hawkins. As of 2005, it had grown into the largest third-party game publisher, with revenues of over US$3 billion. The company grew rapidly through dominating the sports game market (including acquiring exclusive contracts with leagues such as the NFL), acquiring smaller studios, and obtaining licenses to popular IP such as the Harry Potter series.
While the company’s growth has been impressive, its recent stock performance has not. From a high of nearly US$70 in March 2005, the stock has dropped to its current value of US$42.81. To address the problem of underwater stock options, the company has proposed a new plan that will offer top executives additional shares and options. According to a proxy statement issued by the company, “underwater options may not be sufficiently effective as performance and retention incentives” and the company needs to “maintain competitive employee compensation and incentive programs that will assist us to motivate and retain our employees.”
The gaming industry in general has been suffering as sales have dropped off in anticipation of the next generation of console hardware. However, EA has had additional problems that have caused its stock prices to fall even more precipitously than rivals such as THQ and Activision. A combination of poor earnings results, layoffs, and settlements involving overworked staff have driven the stock down over the last year.
While the majority of these new stock rewards will go to upper management, EA has offered smaller stock programs for their rank-and-file employees for many years. When I worked there, even the lowliest peon was allowed to purchase a limited number of options at 75 percent of the current stock price. Even if the stock stayed flat, you could still make a small amount of money on this plan. If the stock continues its fall, however, employees currently under this plan will be in trouble.
The plan is subject to shareholder approval at EA’s annual meeting on July 27.