pete, only the paranoid survive ;-) moving on from the name calling, you said:
>>So all those profits Bill Gates has earned on
his stock options are funded by OTHER SHAREHOLDERS willing to pay Gates
increasingly higher amounts for the privilege of sharing in future Microsoft profits by
buying shares from Gates which he purchased from Microsoft at an agree price
(market value at the date of option grant) - such profits are NOT an expense of
Microsoft since no Microsoft assets left the company to fund those profits.<<
so are you saying that the current shareholders didn't lose anything? you know that isn't true. they lost earnings per share which are now lower.
of course the shareholders aren't a company. i didn't phrase it very well, but the main reason a company is in business is for the benefit of their owners, in this case the shareholder. well, ideally from the shareholder perspective.
what is the difference between a 50% reduction in eps or a 100% increase in outstanding shares to the person that the business is supposed to benefit, the shareholder? what company has higher eps at any given time? are the businesses different? the answer is that the method of compensation can drastically change the reported eps - FOR THE EXACT SAME BUSINESSES.
buffet had this to say
>>Warren Buffett, however, disagrees. In his recent
letter to shareholders, he wrote that after
Berkshire Hathaway acquires a company, it will
often report higher employee compensation costs.
Buffett: "Their reported costs will rise after they
are bought by Berkshire if the acquiree has been
granting options as part of its compensation
packages. In these cases, 'earnings' of the
acquiree have been overstated because they have
followed the standard-but, in our view, dead
wrong-accounting practice of ignoring the cost
to a business of issuing options."
Buffett continued: "When Berkshire acquires an
option-issuing company, we promptly substitute a
cash compensation plan having an economic value
equivalent to that of the previous option plan. The
acquiree's true compensation cost is thereby
brought out of the closet and charged, as it should
be, against earnings." <<
of course, he is paranoid too ;-) but he understands this. his eps go down - FOR THE EXACT SAME BUSINESS - due to a change in compensation - NOT A CHANGE IN THE BUSINESS. you may think this is appropriate. however, it very reasonable to question whether the method of compensation ALONE should have such a profound impact on reported results, ALL ELSE BEING EQUAL.
if warren buffet feels this way then i respect his business sense enough to find out why and learn the impact on my future investment decisions, if any.
here is a link to the article forbes.com
i'm not convinced it is as bad as barons says it is. however, i can easily see how providing options in lieu of salary (easy to do when stocks have gone from regular valuations to bubble valuations) hides costs. IF, for example, the stocks perform poorly and employees demand cash instead of options then we have A COMPLETELY DIFFERENT COST STRUCTURE for the EXACT SAME BUSINESS. again, this is fine with you. but it is reasonable to ask whether COMPENSATION METHODS should RULE THE DAY or whether THE CONDITION OF THE BUSINESS RULES THE DAY.
my other concern would be if a company has a significant amount of barely out of the money options and they don't report it in dilluted earnings nor inform the gen'l public about it through their financial reports.
as long as people are informed how the system works then i don't have an issue - unless a more fair way of representing the TRUE BUSINESS rather than COMPENSATION CHOICES is readily achievable. but if you think that companies have never intentionally made it as difficult as possible to find the bad news (ACTUAL COST OF DOING BUSINESS) then you aren't paranoid enough, imho. i see it and have observed the effects many times.
the question to me is what reflects the true status of the business now and proceeding into the future more accurately. the current system or one where costs are associated with option outlays? after all, there is a VERY REAL potential future cost TO THE CURRENT SHAREHOLDER AND POTENTIAL SHAREHOLDER (that isn't reported in diulluted eps when the out of the money option obligation is issued), as well as any new shareholders. again, shareholders are the people that the company is supposed to generate cash for, imho.
some people love reading the fine print. others don't. everyone should. should people have to read the fine print to assimilate all the information or should it be readily represented in a much easier way to understand it - as in, included in reported eps?
different folks may have different opinions, but it isn't as cut and dry as you try and make it out to be, imho. |
