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A Warning About eBay's Options 'Giveaway'

Internet auctioneer eBay (EBAY) is coasting toward next week's shareholder meeting with its shares near their 52-week high -- and with key support for a plan to expand by 50% the number of stock options the company can give managers and employees.

But not everyone is signing off on eBay's proposal to sweeten significantly what is already one of the most generous options plans in the industry. At least one independent reviewer says that eBay's plan will lead to an excessive annual giveaway worth four times as much as the company's net income last year.

That's the opinion of newcomer proxy-advisory firm Glass Lewis. The firm, which recently enlisted former top SEC accountant Lynn Turner and signed the country's biggest public pension fund as a client, described eBay's options practices as "beyond the pale."

Glass Lewis is faulting the recommendation that eBay got from leading proxy adviser -- and rival -- Institutional Shareholder Services.

Last week, ISS recommended that eBay shareholders vote in favor of the company's plan to increase options, saying that the value of the proposal came in under ISS' prescribed cap.

eBay's options-granting practices are getting close to a "red line," acknowledged Patrick McGurn, senior vice president of ISS. But he defended ISS' proxy recommendation, saying that the method ISS uses to analyze options plans is the same one most investors use.

Another important opinion on eBay's option proposal is expected this week from the California Public Employees Retirement System, or Calpers, the nation's largest public pension fund.

Calpers, which is expected to announce how it's voting Monday, is an ISS client but recently signed on with Glass Lewis as well.

Gregory Taxin, Glass Lewis' CEO, says that ISS' analysis is simplistic and ill-founded, based on a market cap swollen by a 43% run-up in share price since the beginning of the year. A favorite company in the newly invigorated Internet sector that is now found in many mutual fund portfolios, eBay shares trade just shy of $100, close to their 52-week and all-time peaks.

Worse, Taxin said, ISS' method of evaluating options plans can be "gamed" by savvy executives and compensation consultants who can do what eBay did -- buy the key to the company's analysis.
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