How eBay Cashes In on Employee Options

Head of Its Class

As a proportion of operating and free cash flows, eBay's options benefits outdistanced those of some of its high-tech and Internet brethren.

Amazon (AMZN Quote - Cramer on AMZN - Stock Picks) and Siebel(SEBL Quote - Cramer on SEBL - Stock Picks), both known for their past profligacy with options, saw no tax benefit from the exercise of stock options last year, because neither company paid income taxes last year, having both lost money. At Intel(INTC Quote - Cramer on INTC - Stock Picks) and Cisco (CSCO Quote - Cramer on CSCO - Stock Picks), the tax benefit related to options exercises in their 2002 fiscal years was 3% and less than 1%, respectively, as a portion of operating cash flow.

Yahoo!'s (YHOO Quote - Cramer on YHOO - Stock Picks) tax benefit last year slightly topped eBay's for the same period as a portion of operating income, coming in at 20% compared to 19% for eBay. But Yahoo!'s total option benefit -- the tax benefit plus the cash it received from employees' exercises -- represented about 51% of free cash flow in 2002, compared to more than 100% at eBay.

At Siebel, Cisco and Intel, the total option benefit as a proportion of free cash flow was less than 18% in their 2002 fiscal years. As a fraction of free cash flow, Amazon's total option benefit was the closest to eBay's, at 90% of free cash flow last year.

How Investors Lose Out

To be sure, the use of stock options does benefit companies. The money companies raise through options can offer a source of working or investment capital.

Conversely, using options allows companies to pay lower cash salaries or bonuses to employees. But while companies and sometimes employees can benefit from options, investors often have a lot to lose.

Already a prolific dispenser of options, eBay is asking shareholders at its annual meeting next month to increase its number of shares available for options grants by 50%. Shareholders have approved similar sizeable increases in eBay's pool of available options in each of the last two years.

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