Sunday, March 15, 2009

Isn't that the point?

eBay recently said it will ask shareholders to approve a plan that would allow it to swap employees' underwater stock options for restricted stock. Essentially, eBay granted the employees stock options on the assumption the stock would go up and they would benefit. The stock has fallen -- leaving the options worthless -- and eBay now wants to make for it.

“Like many companies, we have experienced a significant decline in our stock price over the last year in light of the current global financial and economic crisis,” states the board in its extensive argument in favor of the plans.

However, while eBay shares have indeed fallen over the last year, hitting a 52-week low of $9.91 on Friday, the company’s stock price has been under pressure for years now since peaking at $58.17 at the end of 2004. They lost 26 percent in 2005, 30 percent in 2006, gained gained 10 percent in 2007, and fell 58 percent in 2008. So far this year they are down another 26 percent.

This may explain the shaken belief in the stock option as a reliable instrument of compensation, and why the board has opted to replace stock options with restricted stock, which, “provides value to our employees even if current economic conditions continue and our stock price fails to increase further.”


Stock options aren't meant to be a "reliable" form of compensation. Employers grant stock options to align the long-term interests of employees and shareholders. If the stock rises, they all gain. If the stock falls, they all lose. In fact, the entire point of stock options is exactly the opposite of what eBay suggests in that last quote. Employees shouldn't benefit if the stock continues to drop. They already get salaries, cash bonuses and other benefits upfront. If employees know that they will be rewarded again years later no matter the price of the stock, they won't have the same incentive
to make decisions that will benefit shareholders in the long-term.

Although I'm beating up on eBay, they're certainly not alone in this. That's why I'm glad to see at least some people are fighting this practice at other companies, according to the Associated Press.

"We don't get to trade in our stock so why should they?" said Richard Ferlauto, director of pension and benefits policy for the American Federation of State, County and Municipal Employees, a Washington-based labor group representing government workers.
Investors like Ferlauto plan to fight companies taking such action during this spring's proxy season. As he points out, shareholders have to approve such changes, and many investors this year aren't likely to turn a blind eye to that fact.

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