Ed,
I think we all need to look at the economics of employee stock options. Ostensibly, it is instituted to provide an incentive to employees by putting them on the same side as shareholders. In theory, this is a laudable goal, but in practice it is something else altogether.
First, you have the issue of terribly distorted earnings, because a significant portion of salaries and bonuses are granted in the form of options. The options have a value, but the company does not report that value as an expense, so earnings are invariably overstated.
Next, you have the understandable tendency of top management to push the price of the stock higher because the greater the difference between the market price of the shares and the exercise price of the option the greater the remuneration to top executives. And that frequently leads to management of earnings. [A good clue to this practice is to look for growth in pre-paid expenses. Companies will try to claim that advertising and other periodic expenses ought to be amortized rather than expensed.]
Finally, you have the common practice of repricing the options if the stock does not rise enough to meet management's level of greed, with the excuse that if the options are not repriced employees will leave. If the compensation package were properly structured to begin with, none of this would be an issue. In the old days employees were often allowed to buy stock at a 15% or so discount from the market, and managers were paid bonuses on the basis of company performance.
So in effect, top management receives a sinecure because there is no connection between corporate performance and remuneration. And shareholders are expected to directly fund these exorbitant bonuses.
All of this is really aimed at fooling investors. It is a pernicious practice that has received widespread acceptance among growth companies and little or no criticism from investors.
TTFN,
CTC |
