Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Dell Technologies Inc. -- Ignore unavailable to you. Want to Upgrade?

To: Lee who wrote (52386)	7/19/1998 9:07:00 PM
From: Chuzzlewit	Respond to of 176387

Lee, I'm not a compensation specialist, so my opinion is probably worthless. But I think that stock options are a very poor way to go for the reasons I've outlined. I see nothing wrong with cash bonuses in compensation for goals achieved. It's simple, it's neat, and it's easily accounted for. TTFN, CTC

To: Lee who wrote (52386)	7/19/1998 9:59:00 PM
From: Mohan Marette	Read Replies (1) \| Respond to of 176387

Talk on the Street of lower interest rates-Factors that could affect the market going forward. Hi 'curious' Lee: Check this out and tell me what you think if you have time,will you please? Very interesting to note that now they are talking about lower interest rate on account of the expected contraction in GDP growth rate. If this talk of lower interest should become reality that should be enough to sustain the bull market for a long while yet,no??? Looking forward to hearing your thoughts on this. biz.yahoo.com regards 'curious-er Mohan'.

To: Lee who wrote (52386)	7/20/1998 1:20:00 AM
From: rudedog	Respond to of 176387

Lee - A cash bonus does create a large tax liability at the time it is issued. but because the options are always taxed as ordinary income at time of exercise, there is little difference in the tax impact - just when it occurs. But there is a huge difference in the leverage obtained because of market action. Let's look at Dell as an example. Suppose as a senior Dell manager I get options on 1200 shares, 5 year vesting. Let's say this was a year-end 1997 bonus, granted in mid-December at a strike price of 54. Now Dell goes up a point. Every other Dell shareholder sees a gain of less than 2%. But my potential gain is infinite as a percentage - I went from zero value to $1200. Now Dell goes up another point. Dell shareholders see another 2% gain, but the value of my options has doubled. Dell goes up another 2 points, the shareholders see a little over 3% rise in their stake, but my options have doubled in value again!!! Looking at this example, my 1200 shares were worth $64,800.00 at grant, of which I would have received $0.00 if I exercised immediately. today, only 8 months later, they are worth $140,400.00 of which I would receive $75,600.00 (the company would receive the same $64,800.00 as before). Of course I can not exercise all of the options due to vesting, but if I just sell them as they vest, I have an additional monthly income of $1,260.00 just from the options. and in five years, these will probably be worth $500,000 or more if history is any guide. I will have the edge over the standard investor by a huge margin, because I have no equity stake. There is no downside to this (except that the stock price might drop - in which case I lose nothing). It doesn't matter if the strike price is $1 or $1000 - I make a dollar on every share in the grant every time the stock goes up a point, and I have no liability. Compare that to a cash grant of the same amount. The monthly vesting is 1/60 of the grant, or 20 shares a month. If the company just gives me the cash it would pay under the other plan, I would get $1,080.00 a month for the whole 60 months. The most I could get would be the original $64,800.00, clearly not as good a deal as $500K (assuming Dell keeps growing as it has in the past). This removes the incentive options give - to get employees to care about company performance and stock price. Some folks have proposed a stock-indexed cash bonus as a means of getting around the problem. This would peg the monthly bonus amount to the current stock price, and would thus give exactly the same cash value as if the employee sold his options as they vest. But of course, prudent employees don't do that, because of the leverage I describe above. They want to hold as many of those options as possible, since they get a much larger percentage gain. A cash bonus plan that gives the same upside as holding the options would present a huge and undefined liability to the company. So I think Chuz is right - the only way to work it out is to account for the options in some way on the P&L. Maybe the company should have to execute a derivative instrument on the open market equal to the vesting plan or some such concoction to force the money onto the income statement, and also to balance the shareholders liability with a more general liability on the open market. But since that's way more expensive, and since companies don't have to do it at present, I doubt that you will see that kind of behavior any time soon.