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Technology Stocks : Apple Inc. -- Ignore unavailable to you. Want to Upgrade?

To: donjuan_demarco who wrote (29244)	10/10/2000 4:48:07 PM
From: Adam Nash	Respond to of 213176

Duplicate. See next message.

To: donjuan_demarco who wrote (29244)	10/10/2000 4:48:27 PM
From: Adam Nash	Respond to of 213176

"If the employees have options priced at 45, they could generate a 100% return from this point and not see any return. That just isn't matching incentives to desired actions." Yes, and if an investor bought AAPL at 45, he would also have to generate a 100% return to break even. When an employee agrees to be compensated in options, I think it is understand that he will be subject to market risk. By re-pricing the options, the employer allows the employee to enjoy all the upside, without being subject to the possible downside. Therefore, there is no "incentive" for the employee --- he knows that he will win either way. There is no question that repricing creates a different payoff curve than a straight shareholder, there is no doubt at all. That is guaranteed by the nature of an option in itself. However, it is misleading to say that just because these payoff structures are different that they are not completely aligned. Remember, an employee's total compensation includes options. So someone who expects $100K/yr may get $75K in salary, and a pile of options. If due to a market correction, or company correction, euphemistically speaking, the options become worthless two years later, then effectively that employee has lost a good chunk of their total compensation for the past two years. However, now we are planning the next two years. Do I want to set up a system where a 100% return still leaves the employee compensation for the next two years below expected? That's a guaranteed way to ensure that employee will go work for someone else who will pay them the full $100K in total comp. No, instead you give them new options to incent their future work, either by repricing old options (tax mess) or by granting new ones (Microsoft's recent solution). The problem with the logic of tying employee payoff stuctures to stock vs. options is that the potential for negative returns would then be factored into total compensation. Potential losses and risk aversion would lead to higher salaries for the companies, which is a cash outlay (bad). With options, the company pays nothing if the stock goes down. In fact, the company only pays in dilution, not cash, which at current multiples is great. Plus, the company gets a tax shelter from the "expense" when exercised. Plus they are free on issuance from a tax perspective. There is no question that options are the best mechanism known to tie employee payoff structures to shareholder (company) needs.