The Truth About Verity's Options Grants

Such Generosity The company gives away its income via options faster than it can make it.
	2000	2001	2002
Net Income - as reported	$33,010	$33,760	$1,409
Net Income - (when expensing options)	(25,148)	(67,098)	(77,474)
Source: Alsin Capital Management, SEC filings

The fundamental flaw of a stock option is that it links compensation to swings in a short-term stock quote (the average NYSE stock fluctuates 50% per year) -- not to the creation of long-term business value. That's why option holders can generate windfalls of tens of millions of dollars or more in a single year on the basis of nothing more than a volatile stock quote. In an earlier column, I listed several $100-million option-windfall recipients, most of whom generated their gains with no corresponding increase in business value at their respective companies.

Shareholders suffer when their stock falls precipitously, but option holders, such as those at Verity, can benefit from drops in their stock price. That's because options are granted each and every year at Verity. As you can see below, a bad year is a good year for option holders, because new grants, like those at Verity in 2002, are at a low price.

When Bad Is Good New option grants sport a low price tag
Year	1998	1999	2000	2001	2002
Weighted average grant price	$2.65	$9.78	$31.99	$23.69	$9.47
Source: Alsin Capital Management, SEC filings

Other forms of compensation, such as restricted stock or outright stock ownership, better align employees with shareholders. There are also ways to tie incentive compensation to long-term business value creation -- not to short-term fluctuations in a stock quote.

Ultimately, the board of directors must protect shareholders' property and must design compensation that incentivizes workers without harming shareholders. I doubt this will happen at Verity, where board members are actively feeding at the trough to the tune of 40,000 options each per year. The current system of profligate stock-option issuance is not the answer. Any rational, objective observer would admit to the verity of that.