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The Truth About Verity's Options Grants

Editor's note: This column is a special bonus for readers. This piece originally appeared on RealMoney on June 4, and we're giving you a sneak peek at the entire column.

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At companies like Verity (VRTY), the magnitude of employees' property grab via stock options is nothing short of stunning. The title of my earlier column on the subject, "Corporate America's Dirty Little Secret," is unfortunately all too appropriate: It's the stealth transfer of wealth, under the guise of aligning employee interests with shareholder interests through stock options.

Before we look at Verity, let's break the case down in the simplest terms possible. Stocks represent shares of ownership in a publicly traded business. To use a metaphor, the company is a pie, and the number of slices that you have, relative to the total slices, represents your ownership interest.

When a company issues more shares via stock options, it is essentially creating more slices in the pie. If you own shares in such a company, your property interest then changes: The pie is the same size, but it has more slices. Sure, the company can go into the open market and buy back shares to keep the number of pie slices at the same level. But that still involves taking your property: Corporate cash that belongs to shareholders is used to buy back those shares.

Tough Truths

The most aggressive option issuers (and the most ardent and vocal option defenders) tend to be in the technology sector. Verity, a software concern with a $750 million market cap, is an example of a company that is aggressively effecting a transfer of ownership from shareholders to corporate employees.

After reviewing Verity, it's hard to miss the obvious irony: The word verity means truth. The truth is, the number of options granted each year is outrageous:

The Hard Truth About Options
Here are the grants relative to share base
Fiscal Year 1998 1999 2000 2001 2002
Shares Outstanding Beg of Year 22,036 23,130 25,612 31,606 35,158
Annual Option Share Grants 5330 5604 6567 8418 7164
Annual Grants as a % Shares 24% 24% 26% 27% 20%
Source: Alsin Capital Management, SEC filings

The grab for shareholder property at Verity, via stock options, is at jaw-dropping levels. As you can see in the table above, options grants as a percentage of total shares have hovered around the 25% mark since 1998. That's potentially diluting one-fourth of shareholders' property interest each and every year!
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