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

To: Don Lloyd who wrote (63610)	4/19/2003 8:12:11 PM
From: Stock Farmer	Read Replies (1) \| Respond to of 77400

Don, lexicon is important. If someone says "the increase in share count is already accounted for by looking at the increase in share count" that's one thing. When someone says "the degree to which shareholder's interest is reduced is already accounted for by looking at the increase in share count", that's another. And if we further say that "the time rate of change in shareholders' interest necessary to deliver this year's profit is already accounted for by looking at this year's increase in share count", that's yet another. Sloppy terminology is indeed the root of most of the confusion around stock option expense debate. Management is incurring a non-zero cost on behalf of shareholders, and it is a compensation cost. It is manifest in this thing called "dilution", and also in another thing called "dilution" and yet again in another thing called "dilution", neither of which are the same. Expensing one of these is appropriate. Arguing that we should not expense "dilution" without reference to which one we mean leaves us a 1/3 chance that the other party is having the same discussion with us as we are with them. And there is confusion. You wrote: "In the case of employee compensation and stock and option grants, the use of 'dilution' to simply indicate increased share count is appropriate..."... actually, since the company receives below-market-value consideration when a share is issued to satisfy an option, this results in dilution that is not simply measured in share count increase, but which is offset by the value of the cash recieved. The rest of your post is more or less in line with my own reasoning. And this is the crux: If, and this is a really big if, the management is living up to its fiduciary responsibility to maximize shareholder value, the increase in total company value (from a reduced cash salary requirement) will more than offset the increased share count dilution of existing shareholders, and thus provide them with a net benefit. The ability of a given company to partially substitute stock or options for cash salary AND simultaneously benefit existing shareholders is not a given, but depends on the willingness of employees to accept a limited amount of stock or options in exchange for a sufficiently large amount of forgone cash. Emphasis mine. Problems occur when there is no metric applied to the "if", and no negative consequences to management for the counterbalancing "if not". And indeed we have considerable evidence that the "if not" part is where we find ourselves. For example, assuming that the cash foregone by Cisco employees is smaller than the cash they ended up getting (which we can measure), then Cisco's management is not at the helm of a profitable business model. Either that, or Cisco's management has failed in its fiduciary duty by doling out more value to employees than the cash foregone. Pick your poison. By reflecting the value that shareholders part with as an expense to the company, we simultaneously stress these two assumptions and put them up for review. Management does not want to be perceived as either (a) at the helm of an unprofitable business, or (b) derelict in execution of their fiduciary duty. Negative earnings as a consequence of stock option compensation is clearly a result of one or the other, and management is in an idealposition to determine the proximate cause and effect appropriate recovery actions. Neglect of ficuciary duty will trigger negative consequences in direct proportion to the degree of neglect. This is the hallmark of a good feedback system. Quite a compelling argument for setting the cost of options (actual or forecast is another debate) directly against profits. What do you think? John