It has been a turbulent year for On-Line plc, a small investment firm worth £1m. It owns stakes in financial websites ADVFN and All IPO and its shares have tumbled 54% in 12 months.

In a bear market, such a performance does not make On-Line unusual. However, its latest method for motivating staff through incentive schemes that offer them share options is more out of the ordinary.

Because of the collapsing stock market, On-Line’s board has repriced 1.39m outstanding share options, some dating back to 2003. Instead of having to see the company’s stock rise to 22¼p, 46p or 25p - the old striking prices of the options - in order to cash in, five senior employees, who don’t draw a salary directly from On-Line, only have to help push the share price beyond 20p.

If a director holds options set above the going share price he is said to be “under water”. Resetting the options at a reduced price can bring him or her back in the money.

“The On-Line board felt the company needed to kick itself into gear and wanted the directors to really get going,” said Clem Chambers, ADVFN’s chief executive and one of the five beneficiaries.

It isn’t just small companies that are facing a conundrum. In a year when the FTSE 100 has fallen 34% and the FTSE 250 is off 44%, rethinking remuneration packages is on the agenda at almost every big business. The fear is that if incentives are too far under water, top talent could walk out of the door.

In America, repricing has already happened at several companies. US pay tracker Equilar found that 90% of Fortune 500 chief executives had underwater share options by mid-October. For tax reasons options are viewed as part of an executive’s basic package in the US.

In the UK shareholders must be won over if bosses are to be given fresh incentives. After all, options are meant to pay out if a company performs well rather than guaranteed regardless.

“It doesn’t feel to me that many companies are going to give [repricing] a try here,” said Luc Vandevelde, chairman of Vodafone’s remuneration committee. “Those who do will be severely criticised.”

When jobs are being cut, companies know that they must tread carefully when refeathering managers’ nests.

In October, the Financial Services Authority sent out one of its “Dear chief executive” letters, cautioning banks over excessive bonus schemes it thinks may have contributed to the financial crisis.

“If we have suffered, it feels right directors should suffer too,” said one fund manager.

There are dangerous precedents to steer clear of. In 2001, Marconi, the telecoms-equipment maker, withdrew a proposal to halve the exercise price of share options in the face of an investor furore. The stock had tumbled after the technology bubble burst.

“We are not in favour of retrospective changes in terms,” said Peter Montagnon, director of investment at the Association of British Insurers.

He is also cautious over long-term incentive plans that hand over shares equivalent to a multiple of salary. After the shares slump that could mean executives are given too much value relative to the new size of the company.

Fund managers think incentives are a problem at debt-laden firms that are heading for a debt-for-equity swap, like some of the pub owners.

One investor has concerns about executives who are “looking through the recapitalisation and further out where their bread is being buttered by the banks”.

He highlighted the pay day enjoyed by directors at holiday group MyTravel, once it had gone through a restructuring.

For companies not teetering on the brink of a restructuring, Carol Arrowsmith, executive compensation partner at Deloitte, thinks the issue is more subtle.

Compared with the last recession, a greater proportion of incentives are based on total shareholder return, measured against a list of comparative firms. For those to pay out performance is still relative.

She thinks that revised packages linked in part to earnings per share maturing in 2010 and 2011 are now actually worth very little.

“The majority of these were set at a much more optimistic time,” Arrowsmith said.

Nil-cost options awarded in September 2007 with a face value of £6m to Michael Grade, ITV’s executive chairman, are worth £1.9m today and he may not qualify for many of them at the end of 2009.

Failing to achieve total shareholder return is down to management, but revenue-growth targets look virtually impossible in a steep, industry-wide advertising downturn.

ITV, whose shares have fallen 59% in a year, has said it will not make changes to its long-term incentive scheme, which runs until 2011. However, Grade’s options that fail to vest in 2009 can be rolled over and retested in 2011.

Vodafone moved to make big changes after introducing a restricted stock-award plan last year that encourages directors to buy shares to qualify for long-term bonuses.

Of course, like buses, executives never have to wait long for another grant of share options, which are typically made once a year and linked to the latest share price.

However, Simon Patterson at Patterson Associates, a remuneration firm and alliance partner of headhunter Korn/Ferry, said the turmoil meant some companies were giving up on options altogether as a way to spur on bosses. Several had stopped issuing new options; others were even cancelling existing ones, he said.

Patterson is seeing a trend towards cash bonuses, payable over the short term, say six months, linked to operating performance and cutting costs.

“The problem the companies have is that no-one in this market knows what good performance is,” he said.

Arrowsmith thinks it unlikely that many executives will quit for a better deal elsewhere. “When everyone else has got an issue at the same time, competitive pressure [for talent] is much less than people think,” she said.

Of course, executives who believe they have the ability to turn round their sinking company have one sure-fire route to making money: they could always call their stockbroker and buy shares themselves.

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