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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: Don Lloyd who wrote (29113)	2/23/2003 3:41:23 AM
From: Stock Farmer	Read Replies (1) \| Respond to of 74559

You are welcome. Now that have clarity that stock compensation is a cost (to shareholders) if not to the company itself, perhaps the rest is a matter of semantics. I believe that the company should report its profitability to shareholders and that profitability is net of all costs, including those incurred directly by shareholders on account of the company. Apparently you believe that the company should report what it deposits into employee bank accounts as wages and that if employees end up getting anything else instead (such as stock option compensation) that it's the responsibility of someone else to figure out and remark on this cost. Personally I think this latter view (whether or not it really is your own) is less than complete. A few observations: First, the shareholder or potential investor has no one to blame but himself if he chooses to ignore ongoing dilution Yes. Now, in the process of not ignoring dilution, the informed investor is well advised to contemplate the wealth building potential of the company he intends to own as: Wealth that the company makes for shareholders MINUS Wealth shareholders give up to subsidize above EQUALS Wealth increase of shareholders DIVIDED BY Shares EQUALS Share of Wealth Increase. Whether we make this equation easy by asking the company to report it, or difficult by making shareholders ferret it out is irrelevant. In the end the equation is what it is. The end result ("Share of Wealth Increase") ends up being the same whether the company reports stock option cost as a charge against earnings or whether I figure out what it is and subtract it from earnings. My beef with the company not reporting the information is that in its current form it's almost impossible to figure out. Go crack open a Seibel Systems annual report and try to figure out how much management thinks employees need to take away in shareholder subsidy just in order to show up to do the work that ends up in the profits that they report. And try to figure out how much employees actually do end up taking away. You need both. Because it's important to know both, especially considering that the folks doing the estimates are compensated in proportion to the degree that they get it wrong! So it's not a matter of "accounting" as much as a matter of measurement. Measurement of wealth, measurement of actual profitability, measurement of the company's cost of labor, measurement of management's ability to estimate... Accounting? No. Measurement? yes. Secondly, the idea that accounting can or should be the basis for a comparison between two or more unique companies is a myth. Huh? Accounting isn't the basis, it's the mechanism. Expected increase in dollars in my pocket (or Au or Q!) is the basis. As far as investors wish to compare different companies, it is their responsibility to pay for the necessary research. True, but irrelevant. . Accounting is paid for by the existing shareholders and should be concentrating on providing an accurate and truthful picture of the financial condition of the company under review, and no other. What is truth? If new shareholders stopped stepping up and paying a wage subsidy to the employees, would they keep showing up to work? If so, shouldn't we demand that management be taking steps to reduce any subsidy beyond what is absolutely necessary? If the company was held by a sole owner, how much would this sole owner's wealth have increased this year? Isn't that an important fact that a "truthful picture of the financial condition of the company under review" might reveal? I believe as a shareholder that the company has an obligation to report TO US how OUR WEALTH is being changed. Whether it is increased as a consequence of revenue, decreased as a consequences of wages paid or taxes or materials... or whether it is being decreased by having claims on it disappear into the pockets of employees as a subsidy to wages. Personally I don't give a rats a$$ what a portion of staff compensation costs. I want to know what it all costs. Especially 'cause every dime that goes into the pockets of the staff is a dime that doesn't go into our pockets. Accounting be damned. I care about the dimes!! What's wrong with this perspective? I believe that the company is not honestly representing the facts of the situation when they say "Our very productive employees make widgets that cost $X each", when in actual fact there is a further kicker of $Y each necessary to get them to show up in the morning. And that kicker comes from shareholders. Oh, they are quite honestly representing how much it costs THE COMPANY to make widgets. Just not representing how much it costs for widgets to be made by this company! By reflecting "profits" as the difference between what the company itself pays and what the company itself receives, and not disclosing shareholder subsidized wages, the company is materially misrepresenting management's effectiveness. It's the same as pro-forma earnings. You know: "how profitable we would be if only you guys would pay most of the wages"? LOL And it's like my son's view of profits from his lemonade stand. After I take a day off to help him build it and operate it. And at the end of the day he reports proudly how much "profit" he's made by subtracting the cost of the lemons and sugar he bought from the revenue he received. Is that a true and accurate picture of what it really cost? No, it's a childishly naive picture. Even though it's accurate to the penny. John