Laughing All The Way To The Bank

from the executive-compensation-silliness dept

News.com has an interview with a "compensation expert" (I wonder how you compensate a compensation expert?) concerning the state of executive compensation in Silicon Valley. Over the past year there have been a ton of stories about ridiculous CEO payouts even as a company was collapsing. Remember Webvan and George Shaheen? How about Pets.com giving out millions to the team who shut the company down? More recently AOL tried to hide the "lavish" stock option bonuses they gave execs by claiming they gave no cash bonuses. The compensation expert thinks this is all very bad for the industry. It used to be that people went to work for tech, and took a risk. They got a lower salary and lots of options to increase the upside if it worked out. Now, they're demanding lots of cash salary, huge optiong grants, and ridiculous severance packages. In other words, they have little incentive to do well. The article also discusses the potential impact of having to expense stock options (something most tech companies are violently against, but which increasingly sounds like a good idea). The fact is that accounting for them as an expense is much more accurate - and the point of financial statements is to get the most accurate picture possible of the state of the business.
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  1. identicon
    Gene Hoffman, 24 Apr 2002 @ 12:05am

    Option Expensing

    If a company pays its employees nothing but stock options, generates $1B in free cash flow, and the employees start exercising and selling options two things happen. 1. The company still generates $1B in free cash flow, but the EPS continues to decline. 2. The stock price should either go down or the companies value continues to increase by the price remaining the same and the number of outstanding shares increase.

    How does expensing the stock options paint a more realistic picture? The free cash flow is still $1B and the downside is that EPS decreases - aka shareholders are diluted. I have no sympathy for the argument that we should make P/Ls less accurate simply because folks can't easily understand dilution.

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