What Is an Underwater Proposal
An underwater proposal is a shareholder proposal submitted when the company's stock price sits below the exercise price of outstanding options or awards, leaving those awards with no intrinsic value. These proposals often request companies to disclose the total number of underwater awards, their aggregate fair value, and the per-share exercise price gap relative to current market price. Companies typically file these disclosures in their proxy statements and annual reports, with data sourced from their compensation tables and footnote disclosures. For example, Tesla's proxy filings detail underwater equity awards when the stock trades below the exercise price of its performance-based options and RSUs, as shown in its latest DEF14A filing on the SEC website Tesla DEF14A filing.
Underwater proposals gained traction after the SEC adopted final rules in 2023 requiring pay-versus-performance disclosure in proxy statements, which highlights the gap between stock price and executive award values SEC final rule 2023. The new rules push companies to quantify how many options are underwater and how that affects long-term incentive alignment. As of the latest proxy season, companies such as Apple, Microsoft, and Alphabet routinely include underwater award counts in their compensation discussion and analysis sections. Investors use this data to assess dilution, overhang risk, and the likelihood of future equity grants being repriced or cancelled.
Financial Impact and Market Reactions
When a company has a large number of underwater awards, the implied dilution can pressure the stock price if the company issues new options to replace them. Research from major proxy advisory firms shows that proposals requesting full disclosure of underwater awards receive higher support rates when the company's total compensation ratio exceeds peer medians. According to recent data, companies in the S&P 500 with more than 10% of outstanding options underwater tend to see higher institutional investor scrutiny on their compensation votes Forbes analysis on underwater options. The market often reacts negatively when a company refuses to disclose underwater award counts, leading to lower say-on-pay approval margins.
Companies that proactively reprice or cancel underwater options typically see a modest positive announcement effect, while those that maintain underwater grants without explanation face activist pressure. For instance, SpaceX has disclosed underwater award metrics in its limited public filings, reflecting how private companies also face scrutiny when underwater equity is material to employee compensation. In public markets, the SEC's pay-versus-performance rules require companies to disclose the realized and potential pay for named executive officers, including the impact of underwater awards on total compensation SEC pay-versus-performance rules. This transparency helps investors assess whether management incentives are aligned with shareholder returns over a multi-year period.
How Companies Respond to Underwater Proposals
Most companies respond to underwater proposals by adding detailed tables in their proxy statements that break down the number of underwater options by executive and by grant year. They also disclose the weighted average exercise price, current market price, and aggregate intrinsic value of zero, which quantifies the total underwater exposure. Leading proxy advisors such as Glass Lewis and Institutional Shareholder Services publish guidance on how companies should present this