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Optical/IP

Cisco's Chambers Gets More Options

While one tech giant pushes forward with accounting reform and a higher quality of earnings, another digs its heels into the status quo.

This week, there was no question where Cisco Systems Inc. (Nasdaq: CSCO) CEO John Chambers stands on the stock options debate. He was granted options to buy 2 million more shares of Cisco stock at an exercise price of $18.51 a share, according to a filing the company made with the Securities and Exchange Commission (SEC).

In contrast, Microsoft Corp. (Nasdaq: MSFT) a week ago said it would stop offering employee stock options and would instead give them stock grants, in addition to expensing the options already given out. The decision will likely lead to an after-tax charge that will cut Microsoft's fiscal fourth-quarter earnings per share by about 25 percent, according to the company’s guidance.

In Microsoft's case, even though the company's earnings will take it on the chin from what they could have been, its employees might end up happier under its plan. The employees won't have to worry about their options becoming worthless -- they'll make money no matter what, with directly issued restricted stock.

Of course, the tech industry as a whole isn't exactly lining up to pat Microsoft on the back. "You couldn't compete in Silicon Valley without stock options," Cypress Semiconductor Corp. (NYSE: CY) CEO T.J. Rodgers told CNBC on Thursday. "Microsoft lives in Redmond what's-his-name, and they can do it because they own the town. We don't. We live in the Silicon Valley economy."

That brings us to John Chambers. Stock options are about the only way Chambers, who has drawn a $1 salary and no bonus since April 2001, is paid these days. A spokesperson for Cisco confirms that he has 39.4 million options, 27.7 million of which are vested. Chambers holds about 2,047,199 Cisco shares now, which would bring him a pretax kitty of around $36.4 million if sold at yesterday's closing price of $17.76.

Not surprisingly, Chambers has been one of the most vocal opponents of moves by the Financial Accounting Standards Board (FASB) to require companies to count stock options -- a way of rewarding and, in Chambers' case, paying, employees -- as an ordinary business expense. His rationale is that if stock options were expensed, it would drag on corporate earnings and companies would stop doing it. That burdensome expense to companies would cause them to find cheaper labor in other countries, at least more so than they're already doing (see Chambers Attacks Accounting Plans).

Those in favor of accounting reform say that stock options can understate what it really costs to pay an executive and, in extreme cases, might motivate companies to do wacky things to keep their stock price high.

What's the difference? Had Cisco expensed its stock options during the nine months that ended April 26, its net income would have been $1.6 billion instead of about $2.6 billion, according to one of the company's SEC filings.

— Phil Harvey, Senior Editor, Light Reading

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lightreceding 12/5/2012 | 2:47:05 AM
re: Cisco's Chambers Gets More Options Chambers gets press for taking a $1 paycheck, yet here he takes another 2 million options. Cisco could sell this stock in the open market and use the cash for something useful instead of giving Chambers millions more to add to the millions he already has. At the same time that they give these options they are doing a stock buyback to reduce the dilution. Why not just stop giving the options?
optical_man 12/4/2012 | 11:44:30 PM
re: Cisco's Chambers Gets More Options Before you get all bent about 2M Options to Chambers, consider the size of the company.

To put it into perspective, a small voip company, Sonus, gave it's CEO 2M options this month.

Which one (given size, revenue) seems more disproportionate?
road__runner 12/4/2012 | 11:44:29 PM
re: Cisco's Chambers Gets More Options Good point optical_man

Also compare the total outstanding shares of Cisco (7B) with Sonus (225M) to do a proper comparison.

Of course the Sonus CEO is probably still drawing his $300K salary and $100K bonus (just speculating the numbers here) on top of that as compared to Chambers' $1 per year for the last two years and look at how much cash burn a company like Sonus can afford compared to Cisco.
wainflete 12/4/2012 | 11:44:28 PM
re: Cisco's Chambers Gets More Options road_runner,

You're off by a factor of 2.

For the details, see:

www.sonusnet.com/docs/corporat...
digerato 12/4/2012 | 11:44:25 PM
re: Cisco's Chambers Gets More Options "road_runner,

You're off by a factor of 2."

Yes, but Hassan still got paid approx $170K in 2002, and it took the Sonus execs a whole 12 months longer to get around to giving themselves a pay cut (April 2002) vs Chambers. Even then, they only cut their pay by 50%.

And somehow, despite Sonus' awful performance, Hassan still managed to collect a bonus in 2002. Perhaps it was a layoff target bonus? Not to mention that Hassan is beneficial owner of 8.4m Sonus shares (not counting the 2m new options).

Cheers,

Digerato
single mode figure 12/4/2012 | 11:44:12 PM
re: Cisco's Chambers Gets More Options The horror! Up river john is seated surrounded by loyal legions of xcisco elite consuming the wealth created by an army of vc's....
signmeup 12/4/2012 | 11:44:09 PM
re: Cisco's Chambers Gets More Options Regardless of what has happened in the past, it is quite obvious that JC is using his enormous influence to maintain his monopoly. Chamber's message at the start of the downturn was "Attack!" and use the billions of $$$ in cash reserves to outlast the competition. One of his faviorite slides is showing CSCO's market capitalization versus the next 10 competitors - CSCO engulfs them all....

JC would like nothing more than to see the networking world dominated by CSCO for the next 20 years. All of his rhetoric claiming competition is healty is nothing more than lip service to appease their largest customers who are afraid that CSCO will stop listening to them if the competition goes away. Of course it could be argued that CSCO has never listened well, but that is an entirely different matter...

The aquistion of Linksys was in direct reponse of Dell announcing their intention to enter into the low-end switching and CPE space.

The problem with influence is that it becomes all to easy to use it for personal goals rather than for the greater good.

Let's see how long JC is able hold out and refuse to give employees stock grants and expense the options already given out. That will be the true level of his influence.

telebud 12/4/2012 | 11:44:09 PM
re: Cisco's Chambers Gets More Options Any EVIDENCE Chambers Cooked his books?
here's some of Chambers awards.
Awards:

Best Investor Relations by a CEO, Investor Relations and Barrons magazines, March 2002
Number Seven Best Place to Work, Sunday Times, UK, March 2002
Top 15 Best Places to Work, Fortune, February 2002
Second Most Admired Network Communications Company in America, Fortune, February 2002
Number One Best Employer, Australia, January 2002
10 Most Powerful Companies in Networking, January 2002
Spirit of Achievement Award, NCLD, April 2002
Outstanding AchieverGÇÖs Award, Lab School of Washington, November 2001
Champion of Workplace Learning, ASTD, June 2001
Member, President George W. Bush Transition Team, Education Committee, December 2000
Number Six, High TechGÇÖs Top 100 High Rollers for 1999, November 2000, Upside Magazine
CEO of the Year, Chief Executive Magazine, 2000
Best Boss in America, 20/20, 2000
Top 10 Most Influential Leaders Shaping Technology, Time Digital, 2000
Number 2 CEO in America, Worth Magazine, April 2000
Internet Industry Leader Award, 2000, U.S. Internet Council
Mr. Internet, Top 25 Executives Worldwide, Business Week, 1999
Member, President Bill Clinton Trade Policy Committee, 1998
BobbyMax 12/4/2012 | 11:44:05 PM
re: Cisco's Chambers Gets More Options The scheme of giving away stock options or real share as Microsft has done is certainly ias ad hoc and capricus. No one should receive any thing except salary. Award of stock options has corrupting influence on the employess. It also has the ill effect of stealing shareholders's money. Our citizens end up subsiding the stock options. These tricks of introducing options is to be declared illegal.
gea 12/4/2012 | 11:44:04 PM
re: Cisco's Chambers Gets More Options BobbyMax:

All your base are belong to us.
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