Nihil, I think that you labor under a number of illusions with respect to options. There are really five issues here.
1. The first issue is not how to compensate employees; it is how to account for the compensation. Under current accounting guidelines that compensation does not appear on the income statement. That means that the true cost of salaries is routinely understated. This is nothing less than dissembly.
2. The second issue is the continuing use of the issuance of equity as a vehicle for compensation. Quite apart from the accounting this is a poor approach because it subverts the purpose of equity capital which is to provide the lon-term funds required by the business for its operations. The exercise of options generally provides precious little capital to the business and only serves to dilute existing shareholder interest.
3. The use of stock options is often claimed to act as an incentive for employees. They will work harder, so the theory goes, if they are on the same side of as the shareholder because they are sensitive to the price of the stock. But the fact of the matter is that in company after company options are exercised and immediately sold. There is no long-term incentive that extends beyond the vesting period.
4. Even the incentive during the vesting period is questionable. Companies routinely reprice options when market conditions are unfavorable. Some examples: IBM several years ago, SEG almost on a routine basis, PSFT a couple of months ago, Dell in the fall of 1997, and many, many more. This shows that the options were never intended as an incentive -- their intent was as an off the books salary. And the repricing behavior suggests that they are acting like entitlements.
5. The argument is frequently made that they are useful devices for startups that cannot afford to pay the salaries, so they provide options in lieu of salary. Fair enough. But CSCO, DELL, IBM, LU, and BA (for God's sake!) as start ups?
This is what needs to be done: get rid of these things. Pay for salaries in cash. Pay for bonuses in cash. If employees wish to buy stock they are free to do so using their cash salaries and cash bonuses which are fully accounted for.
TTFN,
CTC |
