In 1998, Fifth Third Bancorp of Cincinnati issued options on more than 4.2 million shares to its employees, giving them the right to purchase shares at a future date for $55.74. On Wednesday, Fifth Third stock was trading around $46, rendering the options worthless for now.
Though the shares could eventually recover, making the options valuable again, so-called underwater options represent not just a loss on paper, but a potential crisis in today's tight labor market. 
Fifth Third, considered one of the best-run banks in the country, is one of many now facing the consequences of a bear market for bank stocks. With bank stocks off 35% in the past year, stock options have lost much of their mojo as a retention tool. And that is forcing banks to rethink their retention policies as they compete with start-up companies flush with venture capital cash and eager to give new employees a stake in their fortunes.
"With bank stock prices dropping, people are having to be more creative in keeping people," said Paul Reynolds, executive vice president of Fifth Third Bancorp. "We're urging people to stay the course and look at the long term."
Typically, the so-called strike price of a stock option - the price at which an employee would buy the stock - is near the market price of the stock at the time of the grant. Consequently, banks with the biggest stock drops have stock options well under water.
For example, First Union Corp.'s 1998 employee stock option plan granted 16.8 million shares at a strike price of $51.97. The Charlotte, N.C., company's stock was trading Wednesday in the $29.50 range. Also in 1998, Bank One Corp. of Chicago, granted 8.9 million shares at a strike price of $54.79; its stock was trading around $25. "Clearly everybody has been encouraging banks to make their employees owners over the years," said Jacqueline Reeves, an analyst with Putnam, Lovell, de Guardiola & Thornton Inc. "The question is, What are the repercussions as the stocks go down?"
The question of options "is weighing on employees more than it has in the past," said Michael E. Mayo, an analyst with Lehman Brothers. "The best that banks can do is stress running the company in the longer term."
At Wilmington Trust Corp. in Delaware, that means reminding employees that the bank has boosted its annualized dividend every year since 1982 and ranks high among its peers with a return on equity of in excess of 20% since 1985, said Ellen Roberts, a spokeswoman. In many cases, options do not expire for many years, giving plenty of time for a recovery.
"People do recognize there is an opportunity for things to turn around," Ms. Roberts said. "They also understand very clearly the impact individual performance options can have" on that turnaround.
Still, banks are forced to consider more immediate solutions, or risk losing talent to aggressive dot-com companies.
Fifth Third, facing a labor squeeze, has in some instances bumped up cash compensation of key employees, Mr. Reynolds said. Last year it gave away restricted stock to employees.
"Because of a tight labor market, we have made some adjustments at the executive level," Mr. Reynolds said.
Other banks may have to delay adopting Fifth Third's strategies. Increasing cash compensation or giving away stock immediately hits the bottom line, whereas expenses from stock options aren't incurred for years. So using cash or stock to keep employees may not be the solution for banks that are stretching to meet Wall Street's earnings targets.
Imperial Bancorp of Inglewood, Calif., repriced its options in 1998, in order to retain management. But few banks are likely to follow suit. Shareholders are likely to complain that repricing options guarantees a reward to the worker regardless of performance.
"Unlike the good old days, boards are going to be very reluctant not to go to shareholders first," said Patrick McGurn, vice president and director of corporate programs at Institutional Shareholder Services, a Maryland company that compiles proxy data on behalf of investors.
In fact, many banks such as Fifth Third explicitly state in their corporate policies they will not reprice options without shareholder approval - effectively reducing the possibility of a repricing to zero.
Bankers point out that options granted this year will look attractive, because their strike prices would be tied to this year's deflated stock levels. The situation is similar to the early 1990s, when bank stocks were depressed and options granted at Fifth Third were in the $8 to $9 range, Mr. Reynolds said.
"Bank stocks have plateaued from time to time," he said. "We think our stock options will continue to have significant value."
