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

To: Stock Farmer who wrote (57716)	2/20/2002 8:54:08 AM
From: RetiredNow	Read Replies (2) \| Respond to of 77400

John, your figures are off-base. You suggest that they give out the equivalent in salaries that options were given out over the last 4 years. I'm suggesting nothing of the kind. Cisco has made it widely known that they underpay in salaries, but then make up for it in options and bonuses. What's more is that in the last 2 years, over half the employees employed to day were hired. That means that over half of the employees are sitting on close to worthless options. I'd bet if you ask any of those employees if looking back, would they prefer a 30% pay hike to the worthless options in their hands, then they'd probably say yes, give me the cash salary instead. Looking at Cisco's stock price potential due to dilution, I'd say going forward, if I was an employee, I'd prefer the salary to options as well. So using that as a reasonable man's premise, I can calculate the cost to Cisco. SG&A expense for the Oct FY01 quarter was around $1.247B (I couldn't find payroll expense, because I'm doing this in a hurry). Let's assume thta payroll expense is about 50% of that number, so about $600M. Bump that up by 30% and you get $780M. Now Cisco is no longer getting the huge benefits from options exercises like they used to in the past, because most of their employees are sitting on underwater options. So the loss of the tax benefit to Cisco from no longer issueing options is not an incremental loss, because they are no longer getting that benefit anyway. We can argue that point a little, though. The way to calculate this if you have more time than I do right now is to take the $180 million in extra payroll expense plus the amount of the most recent quarter's stock options exercise tax benefit, and that will be the resulting decrease in net income. The cash flows impact can be calculated as operating cash flows minus the most recent quarter's tax benefit (which I remember was quite minor). So there is no real operating cash flows impact. THere is a financing impact of strike price times shares exercised, because Cisco won't be getting this anymore, because they won't be doing equity financing anymore with stock options grants. All told, given that options no longer play a big role in generating cash for the business going forward, I'd say boosting salaries back to a respectable level is a damn good way to keep employees motivated, while minimizing dilution. Another way to do it is ask employee, which route they want to go. You get stock options and no salary increase, or you get salary increase and no options. After the last two years fiasco, you'd be surprised at how many people (especially those with families to support) will take the salary increase. What's more is that this will benefit Cisco in the long run in that dilution will be halted, the real cost of doing business will be recorded on the income statement, which means that management's goals will be aligned with the goals of the shareholders, namely increasing economic value of the company.