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Technology Stocks : PSFT - Fiscal 1998 - Discussion for the next year -- Ignore unavailable to you. Want to Upgrade?

To: Tom Smith who wrote (2101)	9/3/1998 6:51:00 PM
From: Chuzzlewit	Read Replies (1) \| Respond to of 4509

Tom, I think you are laboring under a lot of false assumptions. Let me take them one at a time: 1. There is no direct cost to the company (through standard accounting systems) of granting options. But there currently is a tax incentive for doing so. I am not an accountant, so I won't try to explain this, but accountants have pointed this out to me. So hypothetically, a company granting an option to buy a stock for $10 that sells on the open market for $40 does not recognize a loss (or payroll expense) of $30. That $30 "cost" is borne by all of the shareholders through dilution. That is why you now see basic and fully diluted earnings reported. 2. If an employee can immediately sell the stock granted by an option there certainly can be no long-term incentive. At best, this will provide a short-term incentive to increase the price of the stock. 3. Companies who's performance has not been good routinely reprice options. Seagate is a particularly egregious offender in this practice. 4. If the options were for restricted stock, there might be some incentive. But that is not the case. 5. Sorry to say it, but the motivating factor behind the options programs is to hide material information from share holders. There was an article in Forbes some months ago on this issue, and it is well worth reading. Let's look at one of your arguments in more detail: The economy in general would benefit tremendously if ALL employees were paid a portion of their compensation in the form of stock options. The nation's savings rate would increase since the options could not be spent as quickly as cash, thus enforcing a de facto savings program on every employee. Employees would also be very unlikely to organize strikes against their employers if such an action would deflate their options' value. (Would the GM, UPS, or Northwest Airlines strikes have occurred if their employees were holding a significant number of stock options?) The fact is that stocks purchased through incentive plans are generally sold immediately up exercise because, among other things, holding the stock would trigger alternative minimum tax. So there is an immediate conversion of the stock into cash. Second, the overwhelming majority of the options granted go to the very top executives, thus rendering the remainder of your argument moot. If you look at the issue dispassionately, you will discover that stockholders suffer as a result of these schemes, since they obfuscate the true employment costs (and this is done on purpose!). Go to a neutral site (say Boeing for example) and look at the number of options exercised by top management vs. the total number of options exercised by employees as a group, and I think you'll clearly see what I'm driving at. I also suggest you read the Forbes article. Sorry, I don't have the URL at hand, though it is on the web. After you do a little reading on the issue I would like to revisit the subject with you. TTFN, CTC