2HRS2GO: Cash should replace options games

3 min read

COMMENTARY--Too bad compensation planners haven't learned any lessons from the stock market downturn.

Broadcom (Nasdaq: BRCM) this week became the latest member of the technology industry to propose a stock options swap, which would take place six months and one day from the deal's deadline. Companies like to describe these things as options "exchanges" rather than "repricings," much like U.S. presidents prefer the term "police action" to "war."

The terms by themselves aren't troublesome. But it's disheartening to see that corporations continue to believe that employee rewards should be tied to share performance.

Ever since the Financial Accounting Standards Board last year decided that options repricings mean charges to the bottom line, information technology employers have been looking for ways around it. One of the most popular methods has been the six-months-and-one-day approach that Broadcom is proposing. Sprint (NYSE: FON) and Ariba (Nasdaq: ARBA), among others, have proposed six-and-one plans.

Other tactics include replacing options with restricted stock, or simply doling out additional options at a new, lower strike price. Amazon.com (Nasdaq: AMZN) basically repriced flat-out, giving employees the chance to trade in current options grants for smaller batches with a lower strike price.

At the time they occurred, the Sprint and Amazon.com deals didn't bother me. Within the context of the options game, those companies are simply doing what they have to do to please workers whose expectations have become tied up with Wall Street.

Unfortunately, it would be even better if someone would shatter that illusion.

Options became popular in the technology and Internet industries because it was a way to handsomely reward employees without using the company's cash. In essence, shareholders directly subsidized employee bonuses. Staffers at places like Microsoft (Nasdaq: MSFT) became millionaires as Wall Street sent stocks soaring.

Stock compensation critics have often harped that options in fact cost far more than financial statements indicate. The point is debatable; given that options charges don't hurt the balance sheet, most people aren't about to worry about accounting charges on the income statement.

But there's better reason to oppose stock options: they have nothing to do with employee, or even corporate, performance.

In most cases, an individual worker's skill won't juice the stock. Ernie the Engineer and his team might design a mind-blowing PC processor for Intel (Nasdaq: INTC) or Advanced Micro Devices (NYSE: AMD), but they can't change the fact that the desktop computer market is saturated. Tessa the Tech Support Rep could earn extremely high marks for her ability to quickly help users of Oracle (Nasdaq: ORCL) or Manugistics (Nasdaq: MANU), but there's nothing she can do about a slowdown in applications purchases.

But those larger trends are among the reasons why stocks are down and 80 percent of options are underwater. People who do their jobs well aren't being rewarded.

Conversely, the tech bubble made millionaires out of people who didn't deserve it, just as it conferred huge market capitalizations on companies that didn't deserve it. Options have been sending exactly the wrong message; bonuses have nothing to do with how well people do their job, or how effectively (or ineffectively) a company performs.

As technology companies mature, their compensation policies ought to as well. They should stop relying on the largesse of the Big Board and Nasdaq. A truly solid organization will generate plenty of spending money that can be used to reward employees as they earn it. It's not as though a company like Sprint doesn't generate a lot of cash from its operations.

Cash bonuses. What a novel idea.

Sadly, it's still easy to dangle the options carrot. In a perverse way, it may even be easier than before, with prices down so far from their peak. "Look, now you have a cheap strike price with these new options. You're bound to make money when they vest!"

At the oversold companies, that's undoubtedly true. Many tech leaders will rebound in the long run, and then their employees will be cashing in again.

And it will come again on the backs of shareholders instead of coming from where it really should: company coffers. 22GO >