Hi Lizzie, that post is right on target. Non-qualified stock options exercises benefit everyone but the shareholder and the company in the long term.
1) The company benefits in short term from the tax benefit. When n-q options are exercised the expense is recorded as a reduction of net income for tax purposes, but not for GAAP net income. So SEC income statement looks great and operating cash flows get a nice boost. It was so good at Cisco that during the peak years, Cisco barely paid taxes.
2) Employees benefit because they get equity, although they do have to pay lots of tax (anywhere from 50-60%, when they get caught up in AMT).
3) The government benefits because they get a windfall in tax revenues from options exercises.
Now the shareholder loses because the stock gets watered (more shares get distributed, which reduces EPS and the stock price). It's bad for the company in the long term, because the o/s share number grows fairly rapidly. It's so bad now at Cisco that they have 7.3 billion shares outstanding. That alone puts a hard cap on how high this stock can go.
IMHO, the best way to curb these abuses is to unify tax and GAAP treatment. Or make non-qualified stock options illegal. Incentive stock options have to be treated as an expense and don't benefit the company as much, so there's less chance for abuse. I don't think getting rid of stock options is the answer either. I think options are a real incentive to attract the best and brightest. Cisco has proven that. But right now, the way they are doing it is enriching the employees at shareholders expense. Just something to think about.
Also, don't get me wrong. I think Cisco is one of the greatest companies in existence today. But if they don't figure out how to reduce that o/s share number, while still maintaining a healthy cash flow and cash and investments balance, then I worry that the stock will have very limited upside potential. Some on this thread believe that without this stock options scheme, Cisco would not generate meaningful cash flows. I think that's hogwash, but there was enough truth in that in the past to make me nervous as a shareholder. |
