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Member, Beacon International Group, Ltd.
NEW YORK-Here is how the Travelers Group 401(k) plan stock option program would work.
Employees can exercise their stock options only through cashless, "sell to cover" transactions. Under this approach, no money or other plan assets are used to exercise the stock options.
Instead, the plan trustee receives as a type of loan from Travelers the number of shares matching the options to be exercised. Then, the trustee would sell on the open market the number of shares needed to cover the exercise price. From sale proceeds, the trustee would pay Travelers for the cost of the shares, which would be the exercise price. The trustee then would deposit in the employee's account shares representing the sale profit.
An example illustrates how this "cashless" transaction would work.
Assume an employee wants to exercise an option for 100 shares of Travelers stock at $60 a share. The current trading price is $75. The plan trustee would "borrow" 100 shares of Travelers stock from the company. The trustee would sell 80 shares on the open market to raise the $6,000 exercise price.
The trustee would pay $6,000 to Travelers to cover the cost of the shares. Twenty shares of Travelers stock-worth $1,500-would be deposited in the employee's account.