| The direct cost to shareholders of stock
| |
| | 12%; IBM, 8%; and Oracle, 16%.10 These
|
| option compensation is the dilution of
| |
| | cost effects extend for many years,
|
| their ownership interest. A common
| |
| | depending on the life of the options. At
|
| managerial response to the dilution is to
| |
| | many companies, options have a life of
|
| buy back outstanding shares. The trouble
| |
| | five years. Increasingly, companies
|
| with that solution is that it devours
| |
| | extend their lives to as long as 10 and
|
| corporate funds that might be more
| |
| | 15 years.
|
| profitably deployed. Shocking indirect
| |
| | Accountability
|
| costs are accounting rules that fail to
| |
| | Legal rules are ill equipped to police
|
| require employee stock options to be
| |
| | executive compensation. The general
|
| recorded as an expense on the income
| |
| | stance of U.S. courts is to evaluate
|
| statement. This translates into earnings
| |
| | compensation issues, if at all, under a
|
| per share figures that overstate actual
| |
| | waste standard. This standard rarely
|
| earnings for companies with executive
| |
| | upsets corporate decisions. Waste
|
| stock options outstanding. Even the
| |
| | requires pretty much the irrational
|
| diluted earnings per share figure does
| |
| | trashing of corporate assets in ways akin
|
| not reflect these costs.
| |
| | to dumping truckloads of cash into the
|
| Accordingly, you must adjust earnings
| |
| | Hudson River. In the case of executive
|
| figures for the cost of options. Doing
| |
| | compensation, U.S. courts are quite
|
| this is not easy, however, for not all
| |
| | deferential to management indeed.
|
| information is necessarily found in the
| |
| | As for securities disclosure laws, the
|
| financial statements. You need to examine
| |
| | SEC requires substantial and focused
|
| the footnotes for something called
| |
| | disclosure of top executive compensation
|
| overhang, which is the percentage of the
| |
| | in comparative performance charts.
|
| company that outstanding stock options
| |
| | Nevertheless, corporations continue to
|
| would represent if they were exercised.
| |
| | structure executive compensation packages
|
| The average percentage has mushroomed
| |
| | so that they don't show up in the
|
| from under 10% a few years ago to nearly
| |
| | bottom-line numbers. For example, after
|
| 15% now.
| |
| | accounting standard setters ruled that a
|
| Still, the actual cost of options is not
| |
| | reduction in the exercise price of a
|
| presented directly, though there is some
| |
| | previously issued option had to be
|
| footnote disclosure about this. The real
| |
| | recorded as an expense on the income
|
| cost equals the price at the time of
| |
| | statement, many companies chose instead
|
| exercise minus the amount the executive
| |
| | to extend the life of the option.
|
| pays (the exercise price). This is the
| |
| | Without effective legal or accounting
|
| truest measure of cost because the
| |
| | regulations, the chief job of policing
|
| company could have generated that much by
| |
| | executive compensation lies with the
|
| selling the optioned shares to others at
| |
| | corporate board. Board members must
|
| the prevalent price instead of at the
| |
| | insist that executive compensation peg
|
| option price. The cost of executive stock
| |
| | individual contributions to corporate
|
| options is substantial, averaging about
| |
| | performance. Measuring executive
|
| 5% of annual earnings among S&P 500
| |
| | performance by business profitability is
|
| companies and in some cases amounting to
| |
| | the most definitive yardstick with regard
|
| half of reported earnings, including at
| |
| | to shareholder as well as labor
|
| Yahoo!, Polaroid, and Palm.9 In less
| |
| | interests. When measuring performance,
|
| dramatic but still striking examples, if
| |
| | companies should reduce earnings by the
|
| stock options were recorded as a cost,
| |
| | capital employed in the relevant business
|
| the 1999 earnings of some major companies
| |
| | or by the earnings the firm retains.
|
| would be slashed: Cisco, 24%; Microsoft,
| |
| |
|
