scott, there are two reasons.
1. using options to pay employees only works when the stock goes up. when you use options to pay employees you effectively transfer the cost of keeping employees directly to the shareholder and it doesn't pass through the income statement. this boosts eps and share price, thereby assisting in the option payment scamola.
this is the good side. now for the bad side that nobody tells you about ;-) i know an engineer who was hired by one of the disk drive companies. the stock was $55 and he received 2k stock options with a strike of $40. he was sitting pretty with a quick bonus of $30k. he felt great. that stock is now $10. not only did he lose the $30k he thought he was going to get he will no longer see any growth there.
the bottom line? he and his buddies want raises. they don't want options anymore. they want cash money. or they may leave. if they stay they aren't happy. well, a pay raise goes through the income statement, thereby reducing earnings and reducing stock price which causes a negative spiral.
2. buying high and selling low is bad for anybody's financial health, whether it be you, i or ibm. if ibm spends billions on stock at $140, what happens when it hits $70? does wonders for stockholder equity and other measures of fundamentals.
now, to make matters worse, when you borrow money in order to buyback shares in order to boost eps.... imagine borrowing $5 billion to buy back stock now worth $3 billion. this isn't a long term, financially viable solution but it is what ibm does....
it all works while the stock price moves up. when it moves down, though, eps are leveraged into a negative spiral that can be, and will be, nasty... |
