Electronic Arts 2009 Annual Report Download - page 24

PROPOSAL 2. APPROVAL OF THE EMPLOYEE STOCK OPTION EXCHANGE PROGRAM
We are asking stockholders to approve a voluntary program (the “Exchange Program”) that, if implemented, will
permit our eligible employees to exchange certain outstanding stock options that are “underwater” for a lesser number
of restricted stock units to be granted under our Equity Plan. On May 7, 2009, our Board of Directors, upon
recommendation by our Compensation Committee, authorized the Exchange Program, subject to stockholder approval.
Options eligible for the Exchange Program (the “Eligible Options”) will be those with an exercise price greater
than the 52-week high trading price of our common stock on The NASDAQ Global Select Market (measured
from the start of the Exchange Program) and a grant date that is at least 12 months prior to the start date of the
Exchange Program. Eligible employees who elect to participate in the Exchange Program may surrender one or
more outstanding grants of Eligible Options and receive in exchange restricted stock units for a lesser number of
shares of common stock. Restricted stock units are rights to receive shares of common stock on specified future
dates when those rights have vested following a required period of employment.
Background
We believe that the alignment of the interests of our stockholders and our employees is best advanced through
the issuance of equity incentives to our employees as a portion of their total compensation. In this way, we
reinforce the link between our stockholders and our employees’ focus on personal responsibility, creativity and
stockholder returns.
Equity awards are an essential part of our compensation philosophy and culture. When EA’s stock price growth
is flat to down, our employees individually experience this impact through the structure of their total
compensation and the broad-based reach of our equity compensation program. Equity awards also play an
important role in our recruitment and retention strategies, as the competition for creative and technical talent and
leadership in our industry is intense. Approximately 99% of our employees have received equity awards in the
form of stock options and/or restricted stock units either through initial hire grants and or as part of our annual
performance review cycle. Since 2005, we have been placing a greater emphasis on the use of restricted stock
units as an incentive for our employees rather than stock options alone. However, as of March 28, 2009,
approximately 51% of EA’s employees held stock options and of these individuals, approximately 99% were
holding options with an exercise price greater than $18.69, the closing price of EA’s common stock on The
NASDAQ Global Select Market on March 27, 2009, the last trading day of our fiscal year.
Reasons for the Exchange Program
The purpose of the Exchange Program is to increase the retentive and motivational value of equity awards for
employees and to incentivize our employees to drive company performance and build stockholder value.
The price of EA’s common stock has experienced significant volatility over the years. On March 28, 2009,
approximately 99% of our employee option holders held at least some options that were underwater, and for
approximately 91% of our employee option holders, all of their options were underwater. These underwater
options have been granted over approximately 9 years and had a weighted-average exercise price of $46.00,
ranging from $18.73 to $65.93. These underwater options no longer provide the retention incentive that they
were designed to have.
As a result of the global economic downturn, overall consumer spending has declined and retailers have taken a
more conservative stance in ordering game inventory. The decrease in discretionary consumer spending
contributed to the decline in the anticipated demand for our products during the 2008 holiday selling season. It is
unclear when the macroeconomic situation will improve. Accordingly, as a result of our performance and the
current economic environment, in fiscal 2009, we announced details of a cost reduction plan. This plan includes
the narrowing of our product portfolio, a reduction in our worldwide workforce of approximately 11%, or 1,100
employees, the closure of 10 facilities, and reductions in other variable costs and capital expenditures.
Despite these actions taken by management, the worldwide economic downturn has negatively impacted our
stock price and our equity valuation has decreased significantly. As a result, the current situation provides a
considerable challenge in maintaining employee motivation, as well as creating a serious threat to retention until
a recovery commences. The stock option exchange would help to address both these concerns and reinvigorate a
culture based on employee stock ownership.
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