Sometimes the truth hurts. Back in 1993/94, the independent FASB determined that employee stock options are a compensation cost that should be recorded as an expense on the corporate income statement, pure and simple. Nearly every other independent, educated observer whose pockets are not being lined in some manner or another by employee stock options has concluded the same. The logic is irrefutable. Here is a some further analysis for your viewing pleasure:
fortune.com
Giving out options costs a company's shareholders in two ways. The first is by diluting their stake in the company. When employees exercise their options, a company has to issue new shares. This means there are more shares outstanding, which in turn means the stake of existing shareholders in the company is reduced. So when an option is issued, it amounts to a claim on the company-- think of it as someone putting a lien on your house. And the only way to find out about that lien is to look deep in the footnotes of the annual report.
The other price shareholders pay is the opportunity cost their company incurs by selling shares at a low price to employees instead of selling them at full price to investors. If a company were to take all those discounted shares and sell them instead on the open market, it would of course have a lot more cash to spend. And whatever it spent that cash on--machines, consultants, salaries, bonuses--would show up as an expense on the income statement. In economic terms there is no difference between compensating employees by giving them cash and paying them with securities that they can convert into cash. To put it another way: If selling shares to the public and using the proceeds to pay an employee is a cost, then selling those shares to that same employee at a discount (and letting him book the resale profit) is no less a cost.
Note: If Oracle is buying back the shares, they are dealing with the dilution problem, but they are not taking care of the second expense. Oracle is paying full market cost to reacquire these shares---an expense which is again hidden from shareholders on the income statement. This is our shareholder money that could be used to hire more engineers or to purchase real equipment rather than being used as part of the CEO/employee compensation cover up scheme. This employee stock option expense loophole, which is really a problem of stealth compensation, has allowed CEO pay to mushroom from 100 times the average worker's pay to 500 times the average worker's pay over the last ten years.
Another good link below:
Stock Options and Common Sense" by Warren Buffet
levin.senate.gov
We could argue all day as to what Tom Siebel is worth., but let me ask you this: Would you buy a company (in its entirety) where the expenses, including management compensation, are greater than what the company is earning? That is exactly what has been the case at Siebel for three years running. This company simply isn’t making any money for outside shareholders (so far). Obviously these are backward looking statements, however, and there always remains the possibility that Siebel could be making money for outside shareholders in the future.
Best regards,
Huey |
