A Big Thumbs Up for eBay's Options Plan

Yet investors and their advocates have become increasingly vocal about the role options play in diluting shareholder value. Meanwhile, a consensus has developed that public companies must report options costs in some fashion on their balance sheets. And a very weak labor market has undercut the traditional argument of options as a hiring inducement.

eBay has been one of the more prolific users and beneficiaries of options. In the past three years, the company has awarded a net grant -- total granted options minus canceled options -- of 32 million options, which is equivalent to more than 10% of the company's currently outstanding shares. The company gained $347 million last year from options-related benefits, which was more money than the company posted in free cash flow.

The company awarded a net grant of 11.8 million options last year alone, which was equivalent to more than 4% of its outstanding shares at the beginning of last year.

ISS took into account eBay's past options grants in making its recommendation. But much of the proxy adviser's formula depends on the estimated value of each option compared with the company's overall market capitalization, a ratio it calls "shareholder value transfer." If a company's stock price increases faster than the average value of its options grants, then it can award more options without hitting ISS' cap.

That's precisely what happened with eBay, according to ISS. The proxy adviser estimated that the value of eBay's options, including those granted but unexercised, those proposed under the current plan, and those available for grant under previous plans, was about 11.5% of the company's market capitalization. Last year, ISS estimated that the value of eBay's potential and actual stock options was about 13% of the company's market capitalization.

eBay's stock price has gone up about 71% in the last year even as its share count also has increased.

"This year, the [shareholder value transfer] is lower as the market cap has increased more than the cost of options," said Rajeev Kumar, a senior analyst at ISS, in an email. "Also, the allowable cap for eBay this year is higher than last year. This again has helped the company in cost comparison."