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To: Carol M. Morse who wrote (62820)	1/30/2003 3:52:03 PM
From: Stock Farmer	Read Replies (1) \| Respond to of 77400

Hi Carol, Amy knows her stuff. I tend to agree heartily, and can confirm most of her statements about how private companies dole out equity options. Public companies work that way too. And as to Amy's uncertainty about how salaries are set across the board it's pretty much done the same way in public companies as in private companies. Who owns the company is not really a determinant in the market value of employees. So the formulas are all the same, but some of the constants have different values. The issue isn't whether or not options are good things, or even necessary things. Both of which I happen to believe firmly (in general). Nobody is arguing for the abolition of stock options. Or at least nobody to whom we should pay much attention. The structure of a stock option is perfect as both a carrot and a stick. They are not called "golden handcuffs" by accident. Neither cash nor outright stock have the full range of desirable characteristics. Sure, one can create elaborate structures using non-options but in the end it turns out to be the same cost to shareholders. So it isn't the instrument that is at issue. Nor is it compensation. Nobody worth listening to is arguing that management and employees should not be paid. Nor that they should not be paid fairly in comparison for what they can get elsewhere. In my way of seeing things the issue is whether (a) the owners of the business are readily able to make an accurate assessment of the wealth the business is creating for them, net of all costs to them, and (b) whether there are appropriate feedback systems in place to prevent runaway wage inflation. The first problem is being discussed at length, and several appropriate solutions have been tabled. All revolve around subtracting from earnings a measure of the cost of stock options. Opinions vary on how to best measure this cost and account for the side effects of time delay and so on, but there is growing realization that subtracting a cost is the right thing to do, and that the cost sure isn't zero. The absence of this first solution is what leads to the real problem. Which is rampant wage inflation. There was a time, long ago, when only the innermost of the inner circle received stock options. Everyone else received a fair wage in cash. This practice stands on some pretty fundamental tennents. There is a course one can take on this (I have the notes here at home, no desire to regurgitate inches of theory onto this thread). The summary is that the nature of incentive and retention that stock options represent are inappropriate and even irrelevant outside this select crew. But somewhere along the line in the late 1980's, some really smart technical folks discovered that not only could they conserve a lot of cash by paying part wages in equity compensation, the public markets which were tuned to big old boring companies were also discounting the insignificant cost of stock options as insignificant. Because in the big companies where only the inner insiders got options and dilution of 0.5% was a Big Thing, this compensation was truly insignificant. As a consequence, these companies "looked better" on paper when compared to companies which did not rely on their employees as amateur venture capitalists. Which turned out to be tremendous incentive for these companies to increase the "free" value. By looking better, folks paid more per actual dollar of profitability than the companies that didn't do the looking-better thing. Raising up the price of the stock and increasing the compensation of the insiders. The electrical engineers on the thread should recognize a positive feedback loop and easily anticipate the outcome. Non engineers who have never seen anyone put a microphone too close to the speaker and experienced that ear rending squeal will just have to take my word for it: the whole things spirals up out of control very quickly until it reaches an unacceptable level. And then someone pulls the plug and the whole thing collapses back to where it should have been. In the case of tech stock options, it has come to the point where every janitor expects to attract stock options as part of the pay package. This is fine. I have no difficulty paying wages to the janitor. As long as he gives up part of his cash and is willing to invest this back in the company that's not a problem. But when the line item on the books reads: Janitorial services.... $0.00 when I know darn well that theres some janitoring going on... well, that's a problem. Because that janitoring counts as part of the cost of doing business. So if as an investor I am comparing the cost of doing business between two firms, one of whom reports the full cost of janitorial services on a cash basis and the other who hides half (or more) of the cost in stock option expense, then I am going to mistakenly think the latter firm is more profitable than it really is. Unless I know how to offset this hidden cost. So feel free to pay the janitor what janitors are worth. Just tell me what it is so that I can make an apples-to-apples comparison between your company and the one next door when I go through the process of figuring out who is more efficient with my capital. The reason the tech lobby is so adamant about not reporting stock options at a non-zero cost is that suddenly their businesses will look less profitable than they look today. Thus they fear that people will pay less for a slice of the action. Which is true. Because these companies actually should look less profitable than they do, because something that costs more than zero is being marked down as costing zero. I am constantly amazed by lobbying which generally parses down to "Oh my goodness, if we admitted that hiring and retaining and motivating employees cost as much as it really does, then we wouldn't look as good as we do today". Yes... that is true. And the problem with that is...? Then there are the folks who say "Oooh, this will cause us all kinds of terrible tracking and accounting difficulties..." This coming from companies which track the inventory bin number of every surface mount resistor on every board that goes out the door and deploy sophisticated software algorithms that track the purchasing behavior of the kids of their customers! Or "The market is already discounting this effect, no need to do it twice..." This from folks who post all over SI about how the PE ratio of company A is so much more or less than the PE ratio of company B without so much as a peep about option overhang or dilution rates. Which, if they bothered to include, would show exactly the opposite conclusion (so it's not like they are merely leaving out irrelevant detail). You have to wonder why smart people belch such nonsense, don't you? What's in it for them? Maybe they are afraid to admit that they have enjoyed being "overpaid" as a consequence of these things? Or that they won't be able to sit at the trough like others who came before? Maybe it's "not fair" that someone in 1999 walked away with ten million bucks for what they are going to earn a measley two hundred grand to do... and what a thousand folk in Russia or India would do for almost free... pretty scary. So of course they invent reasons to preserve the status quo. Wouldn't you? The great options debate needs to rest on the single point of clarity in reporting, and it should center on this point alone. The rest is fog and obfuscation brought on by fear. But we have to face reality some day, the longer we allow status quo the longer we suffer the consequences of unprofitable enterprise masquerading as wealth creation and hampering effective flow of capital to the most productive enterprise. And the way to avoid the paralytic effects of fear is to weild objective facts. John

To: Carol M. Morse who wrote (62820)	1/30/2003 4:38:02 PM
From: hueyone	Read Replies (1) \| Respond to of 77400

Carol: Most things are pretty standard. And your post implied they weren't standard, when in fact, they are. I think options in the industry are granted according to industry norms. Industry standards? Fixed stock option pool? Sorry Carol, but that simply is not true. Perhaps the poster you cited might want to consider these data points: 1. That stock option overhang ((a measure of outstanding options plus options authorized)/shares outstanding), has doubled over the last decade: businessweek.com 2. That stock option overhang has almost quadrupled since the mid eighties: ceonewswire.net 3. That CEO pay buoyed by steadily increasing options grants has grown from 40 times the average workers pay in 1980 to roughly 515 times the average workers pay by 2000: e-insite.net 4. That the pace of rising CEO pay has accelerated in the last decade, moving from 100 times the average workers pay in the company to over 500 times the average workers pay during the 1989 to 2000 year period: levin.senate.gov 5. That the value of stock options grants, partially due to increasing grants of options, has increased twelve fold since 1993: marketwatch.com 6. That the average stock option overhang for tech companies now far exceeds even what liberal minded compensation consultants would say is an optimal level to increase shareholder value: cfo.com 7. And that far from being any standards, some companies, like Siebel systems for example, have stock options overhang that are triple that of the average tech company: Message 18491021 No Carol, precisely because there is no accounting for stock options, there are no standards. The degree of stock option abuse is both increasing and accelerating. Regards, Huey