Tech companies are fighting a losing battle to prevent FASB, the body which sets corporate accounting rules, from requiring them to expense employee stock options. In order to show support that this change should not be made, the board at Apple yesterday got caught in his renown Reality Distortion Field and gave Steve Jobs five million shares of restricted stock in exchange for a boatload of underwater options he already held.
Let’s be very clear: the options, which Jobs would have had to put up some money to actually purchase were they ever to move into positive territory, are totally worthless; the restricted shares will cost him nothing and will be worth whatever Apple’s stock price is at in three years when the vesting period completes. Since the person in Jobs’ position is generally held responsible for the stock price, the board is essentially rewarding Jobs even though he didn’t get his job done.
One of the primary arguments tech companies use is that in their plans, options are distributed much more widely through their ranks than a typical corporation. We’ve all heard the stories of secretaries at Microsoft or Cisco who became millionaires from their options–assuming they cashed in before the current crash. So how does Apple balance reworking all the underwater options held by employees? Jobs, as noted, got free stock but all other staff get to turn in their current worthless options in exchange for new grants whose price will be set six months plus one day later. And they will still have to pay to exercise the new options.
This six months plus a day tactic is being used by quite a few tech companies whose stocks have tanked recently, although Apple’s exemption of its top exec is unusual. The period is the minimum necessary under the current tax and securities law to have the new options considered as different from the originals. Oddly, the rationale for option grants is that they align the interests of the employees with shareholders more directly than just salary and keep the focus on the long term, since grants generally take four or five years to fully vest.
But with this cancel and switch tactic, corporations are completely disconnecting that alignment. For half a year, employees will be best served by getting the stock price as low as possible to minimize the strike price of the new grant. After that, of course, they’ll want to drive the price up. One wonders, though, just how easy it is to make such sweeping changes in momentum and what the effect will be on staff morale.
Why does Steve Jobs deserve different treatment? Last I looked he was an extremely wealthy man and already received substantial compensation for his effort. Remember, Apple isn’t even his fulltime job, he still holds down the chairman slot at runs Pixar Studios. Does this plan really serve the needs of Apple’s stakeholders?
BillSaysThis 