Cisco's Chambers Gets More Options
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