Wayne -
(The one small problem I have with just looking at it from a dilution point of view is that it has a tendency to make an investor underestimate the impact of an ongoing option plan. (at least me)...)
I couldn't agree more, but the current situation is far worse. Not only are companies not being punished for using up a large part of stockholders' free cash in buying back stock without much regard to price, but I'll bet that neither you, nor anyone else has a handle on the rate of share and option grant growth. If you can, take some appropriate company and back out all the share repurchases and look at what the diluted share count trend would be.
Thanks for the vesting point. Every potential share grant, independent of price and vesting, should be counted, IMO.
Regards, Don
(...So those grants are extremely valuable and costing existing shareholders a not so obvious arm and a leg in wealth...)
But the cost is not a direct expense to the company (in the absence of buybacks), but a part of the valuation process for a given share. In fact, the grants create a time series of positive cash flows from exercise proceeds and tax credits. (not sure of the details)
My claim is that the option grant process is a real problem for the shareholder, but not a direct cost to the company as a whole entity. Attempting to convert the dilution into a cash expense only confuses the issue. Valuation must take real dilution into account without allowing buybacks to disguise the issue. Free cash must either be invested in something or paid out as dividends. It SHOULD be the responsibility of management to serve the shareholders by making the best risk-adjusted investment possible, which only rarely (except for fact of WS improper rewards) is buybacks.
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