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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: RetiredNow who wrote (57708)	2/19/2002 9:51:24 PM
From: Stock Farmer	Read Replies (1) \| Respond to of 77400

it's just a thought experiment. Increase cash compensation and decrease option compensation, then profits suffer and cash flows suffer by more. Hardly a recipe for stimulating a faster spinning of the engine, is it? Let's put some numbers on the problem. We've had an equity compensation burden of 18 Billion (pre tax) over 4 years. You'd recommend goosing salaries instead. Let's first look at the par case. 4.5 Billion increased salary cash compensation, plus 2.25 billion of option tax credit not coming in is a 6.75 Billion debit to operating cash flows. Quite a dent in earnings and operating cash flows if you ask me. The extra billion of employee exercise cash not coming in through financing cash flows is peanuts. Really. That 20 Billion pile of cash? It will last maybe 3 years. Ok, that was then, this is now. I'd estimate this year it's nothing as big as it's been in the past. Maybe 80 mil options exercised at 12 bucks average benefit makes only 1 Billion cash outlay for equivalent compensation, minus perhaps another half a billion tax benefit for a negative 1.5 billion to operating cash flows. On parity with annual earnings (once they stop booking deferred revenue and using "free" inventory). The company can go a long way like this, but kiss the stock price goodbye 'cause when E tends towards zero, P tends towards zero too, or else PE goes infinite. And apparently the dumb public only invests based on what "E" looks like (if you believe Cisco and the other companies arguing against accounting for actual effect of stock options as an expense). So if employees really need to be compensated in order to keep them (isn't this the reason why they get these things?), then they'll leave unless Cisco's profits go into the toilet and take the share price with them. Not exactly a winning sales pitch to prospective investors. Or maybe they won't leave after all. We could always posit that Cisco's management has been too generous with option grants and really employees won't leave if they don't get so much compensation. Er, achem, maybe too much value was being handed out? And we get to live with that now for the next ten years while a billion or so pending share certificates hang in the balance? Maybe true, but that wouldn't exactly be putting management's past behavior on a pedestal of excellence. Not surprising actually, since these folks were slurping at the same trough. We have a few poisons to choose from on the table. If you were Cisco's management, would you choose the hemlock, or the nightshade? Or would you try to stick handle through the middle ground with a kind of new-economy Nuremberg defense: "everyone else was doing it too and we had to..."