eBay Clings to Its Options Habit

That higher price means more of the options are being exercised, diluting the stock further. Options equal to 3.5% of eBay's outstanding shares (as of the beginning of 2002) were exercised last year, a higher proportion than at Yahoo!, Siebel, Intel and Cisco.

Also, a number of these companies have taken steps to rein in their options grants. Yahoo! has promised shareholders that it will hold future grants to 2% or less of outstanding shares in any one year. Intel has a similar policy. Meanwhile, earlier this year Siebel founder Thomas Siebel agreed to cancel all of the options he had been granted since 1998.

Thus far, eBay has taken no similar steps.

Instead, eBay wants to increase the number of shares it has available to grant. The additional shares represent more than 4% of the company's outstanding stock. Meanwhile, shareholders already approved increases in the company's pool of options by 7% and 4% of outstanding shares in 2002 and 2001, respectively.

Investors don't typically complain about option-grant increases that amount to 5% or less of shares, said Klinger of Responsible Wealth. But those grants are usually spread over more than one year, meaning an effective rate of 2.5% or less, he said.

A reckoning soon may be at hand, however. The Financial Accounting Standards Board has taken up the issue of stock options and is expected to come up with a proposal later this year that would require all companies to treat options as an expense.

Currently, companies can choose whether or not to expense options. Although some prominent corporations such as the Washington Post and Coca-Cola have said they will expense options, others, including many technology companies, have resisted the motion. A final rule is expected next spring.