PALO ALTO, Calif. (CNN/Money) -
The funny thing that seems to have been forgotten about employee stock options is that they were always supposed to be considered an incentive for employees to do good work. Add value to the company, help the stock price rise, and your options will make you additional money.
At least, that's how the argument started. Soon, though, tech companies realized that employees considered options an entitlement, not a privilege. The effect of the stock price going down wasn't supposed to be part of the equation. If the options didn't grant great wealth, then an engineering worker bee could just walk across the street to another tech company.
So management learned to re-price options, which was kind of like me telling you that all the one-dollar bills in your wallet actually now are Ben Franklins, and it being true. Unsurprisingly, shareholders didn't much like re-pricing because they didn't get their shares re-priced to reflect their losses. Now accounting rules make re-pricing practically impossible.
Into this debate steps Siebel Systems (SEBL: down $0.09 to $8.22, Research, Estimates), with a heralded plan to pay off employees holding on to high-priced -- and therefore worthless -- options. It's a good idea for workers. And it's not a re-pricing. But as we'll see, it's mainly just another way of the playing the heads-we-win/tails-we-win game, while doing next to nothing to alleviate the dilutive effect Siebel's stock options have on ordinary shareholders.
Siebel's plan is to replace all options priced over $40 a share -- not including those belonging to the two co-founders of the company -- with $1.85 per option, up to $5,000 in cash, or restricted stock for employees whose take would be greater than $5,000. In all, the maneuver would enable Siebel to eliminate 32 million options.
Mindful of who benefits here, Siebel explains in a regulatory filing that "we believe that providing our employees with the opportunity to participate in the offer will improve employee morale and better align our compensation programs with the interests of our stockholders."
This is a bold move. As New York Times columnist Floyd Norris noted earlier in the week, this is a fresh way of dealing with the issue of employee options without resorting to re-pricing. Assuming the Securities and Exchange Commission approves Siebel's plans, watch for many other Silicon Valley companies to follow Siebel's lead. That is, companies which, like Siebel, have plenty of cash. (Siebel has $2 billion to play with.)
The downside, however, is the money Siebel will spend on this project to make employees happy. According to the company's regulatory filings, it will shell out about $63.6 million to cancel these options, $27.5 million of that in cash. The cash component alone is a little less than Siebel's second quarter net income. In case there was any question, that money belongs to Siebel's shareholders, who presumably have been paying the salaries of Siebel's employees already.
The company effectively is saying that because one upside potential plan didn't work out, the kind that's supposed to reward employees if and only if the stock does well, it will try a different way. For what it's worth, the option cancellation will do little to ameliorate the potential dilution of the employee stock options. Siebel knows as well as its employees that there's no threat of dilution from the $40-plus options. They aren't ever going to be in the money. That's why Siebel is canceling them.
As I explained in a lengthy piece in the current issue of Fortune, the real dilution threat is from the less expensive options, priced at $10, $20 and $30 a share. Those aren't going away.
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Siebel is one of the best-run companies in Silicon Valley, a maker of software that big businesses use to automate their sales forces and customer-service outfits. It also was one of the highest flyers of the high-tech boom, in part because it wasn't a flimsy dot-com, but rather an immensely profitable company making multi-million-dollar sales to Fortune 1000 companies.
Lately, Siebel has suffered along with every other technology company, however, as corporate information-technology managers have hesitated to buy large, tough-to-install software programs. Its shares, once nearly at $120, closed Friday at $8.22. Public investors who held on for the sickening drop know as much about loss as Siebel's employees do. The company is helping them too, by buying back up to $500 million worth of stock.
Of course, that money, like the dough being used to pay off employees, belongs to the shareholders in the first place.
Adam Lashinsky is a senior writer for Fortune magazine. Send e-mail to Adam at lashinskysbottomline@yahoo.com.
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