eBay Clings to Its Options Habit

Meanwhile, investors already are scrutinizing eBay's option practices. Last year, Institutional Shareholder Services came out against the company's proposed option-grant increase, citing their dilutive effect and the fact that the company could reprice underwater options without shareholder approval.

ISS has not yet staked out a position on this year's proposal. But don't be surprised if some prominent investors or advocates come out against it.

"I think (these types of plans) are being scrutinized much more carefully," said Ann Yerger, director of research at the Council of Institutional Investors. "People are looking at these with a much harder eye."

A Thing of the Past

Part of that comes from the issue of dilution and the focus on corporate scandals. But it also comes as some of the traditional rationales for options are losing weight, especially at eBay.

Options defenders have typically defended their use as a way for cash-poor start-up companies to attract talented workers. Often not able to offer competitive salaries, such companies have granted options as a way to offer the possibility of long-term rewards to workers.

But eBay is anything but a cash-poor company. At the end of the first quarter, eBay was sitting on $1.55 billion in cash and cash equivalents, up from $1.11 billion at the end of 2002.

Meanwhile, unemployment has skyrocketed in Silicon Valley as struggling technology companies have laid off thousands of workers. Unemployment in Santa Clara County, Calif., where eBay is based, now stands at 8.3%. The unemployment rate during the height of the technology boom was less than 2%.

With unemployment so high, investors might rightly wonder why eBay needs to continue dispensing so many options each year to attract and retain workers, said newsletter writer and compensation critic Graef "Bud" Crystal.

"Why is it when there's blood all over [the] streets in Silicon Valley and you've got Ph.D's in computer science who will work for food, why is it that these rates are not coming down faster? The whole pay structure should be coming down," Crystal said.

Crystal suggests that eBay executives may be trying to get the option-grant increase approved before FASB rules that companies have to expense options. Once FASB's rule goes into place, the whole option game may be up, he said.

"This could be the last chance for gas before the bridge," Crystal said.