A Warning About eBay's Options 'Giveaway'

"ISS' analysis is quite elementary," Taxin said. "It's easily gameable for those who understand how it works. Every lawyer that does compensation work is familiar with this thing."

ISS' McGurn denied that giving companies access to the options formula allows them to "game" the system.

"This allows them to come within the boundaries of the allowable cap," McGurn said. "The net effect is that it lowers the potential value transfer to investors."

eBay is among those companies that has paid for access to ISS' options formula. However, McGurn said that eBay also paid for access to the product prior to last year's proxy. Despite that, ISS recommended last year that eBay shareholders vote against eBay's proposals to increase its options pool.

eBay representatives did not return calls seeking comment about its proxy proposal, its relationship with ISS or its reaction to Glass Lewis' recommendation.

Fistful of Failings

Glass Lewis opposes eBay's plan to increase its options count this year because it fails four of its criteria. Among eBay's failings are the following:

The annual cost of eBay's options is excessive relative to the company's financial performance.

Based on eBay's track record, Glass Lewis estimates that the company will hand out nearly 16 million options this year. The average lifetime value of each of those options is about $75, according to Glass Lewis estimates. That translates into an options grant worth more than $1 billion.

In addition to being four times eBay's earnings last year, that amount is nearly equivalent to its total revenues in 2002 and nearly three times its operating income. In contrast, among eBay's peer companies -- a group of S&P 500 companies selected by Glass Lewis that operate in similar business segments as eBay and have roughly similar market capitalizations -- the average annual cost of their options programs was about 1.3% of revenue. Not only is eBay's program more than one standard deviation from 1.3%, it's a "complete outlier," said Taxin.