Thomas, "As long as options remain a taxable benefit (can someone help me understand why?)"
Stock options are a benefit, to employees, in the amount of the difference between market value and exercise price. Which benefit is taxable in the hands of the employee.
The IRS has adopted the stance that whoever gave the employees a benefit is incurring a cost in exactly the same amount. Which cost, like any other cost of doing business is deductable against income in computing taxes owed.
Rather like depreciation of assets is deductable against income.
Interestingly enough, unlike depreciation of assets, the accounting world has decided that since it is shareholders and not the company who bear the cost of stock options that the company will mark the cost as zero. And assumes shareholders will be clever enough to figure out what they are paying and subtract that from what they think the company is giving them.
Of course, most shareholders haven't got a clue how to calculate this number, or even how to go about doing it. Even if the data necessary to do so was made openly available by the company. And thus the typical thing they do is forget about it.
Let's take Siebel. In the three years 2001, 2000 and 1999 Siebel's income statement shows a very respectable net earnings of 374,214 M$.
And deeper inside we see the cumulative employee stock option tax benefit over this period of 260,809 M$. Assuming a 35% effective tax rate, that's a not-visibly-recorded-anywhere benefit to employees of 745,168 M$, or within rounding error of twice what the company earned to the shareholders in this time.
It is much easier to enjoy a dominating position in industry when having to worry about running a business where total costs of doing business (including all the money employees are paid) can exceed total revenues.
Even easier when someone else is paying the extra compensation and doesn't realize it.
As far as the outstanding options are concerned, the impact in the case of Siebel is impressive. In the last 10-K published almost a year ago, they disclosed about 121 Million options issued with strike prices below $21.15 and another 52 Million with strikes between 25 and 109. Assuming the price doesn't dip below $21.15 we can expect those 121 Million shares to be exercised between now and 2009 when the last of them expire. Assuming $30 as an average exercise price, employees stand to rake in 3 Billion or 13 years worth of earnings at the present rate!!!
And that's if the stock price stays flat and no new stock options are granted. Forget about the case where SEBL presents a positive investment at $32 even relative to a T-bill.
It's my opinion that sometime within the next 8 years, shareholders will return to some basic economic principles and re-evaluate how much they are willing to pay for an enterprise where the total costs of doing business are higher than the revenues being attracted.
John |
