A Warning About eBay's Options 'Giveaway'

Companies still argue that options are needed to snag needed technical talent. But it's becoming a hard sell at a time when layoffs and tepid hiring have made Silicon Valley's labor pool neck deep in technical talent.

"You can look at a company's stock plan in isolation all day and the numbers are eye-popping," says McGurn of ISS. "But if that's the level of analysis you get into, you're not going to have anything in your investment portfolio."

Ratings Game

ISS sells its analyses of companies to investors who use the information to determine whether they will invest in the companies and how to vote on proxies. The proxy-advisory firm recently began offering a corporate governance scorecard that rates each company's governance according to a number of criteria.

But ISS allows companies to pay for access to its corporate governance formula, which they can use to determine how certain policy changes will improve their governance score. By potentially giving grades to the same companies that it consults with, ISS has opened itself up to charges that it has an inherent conflict of interest. Meanwhile, critics have charged that companies can "game" ISS' scorecard, making superficial changes to improve their score, rather than fundamental changes for the benefit of shareholders.

As with its scorecard, ISS also allows companies access to the formula it uses to determine whether to recommend an options plan to shareholders, a feature it calls ISSue Compass (Compensation Plan Evaluation). In a promotional pamphlet on its Web site, ISS says that by using ISSue Compass, companies can plug in different variables to determine what plan might meet ISS' approval.

"As compensation faces increased scrutiny by shareholders and the media, the potential for embarrassment is magnified," ISS said in the pamphlet. "With Compass, you can adjust plan features before you finalize your proxy statement."

That companies can buy access to ISS' formula and play around with it to tweak their results points to one of the fundamental flaws in the way ISS judges options plans, said Glass Lewis' Taxin.