eBay's Plan Too Big for Some Rulebooks

In its annual report this year, the company essentially restated how much its options cost it in 2000 and 2001. Its estimated loss for those two years, including options costs, was $127 million larger than the company estimated in its annual report filed last year.

The company's explanation, according to a published report, was that the difference was due to a "clerical error."

Accounting regulators are likely to require all companies to expense stock options beginning next year. Meanwhile, a number of companies, including some in the Internet and technology industries, have begun to either expense stock options voluntarily or curtail their use.

In contrast, eBay does not expense options and it hasn't moved to limit its use of them.

Out of Bounds

The company's largesse when it comes to options appears to violate both Fidelity and Vanguard's guidelines. Fidelity's proxy rules, for instance, call for the mutual fund company to withhold its vote on a stock plan proposal when the sum of the stock available under a company's stock plan adds up to more than 10% of outstanding shares.

Fidelity does give some leeway for companies with smaller market capitalizations, allowing their stock plan dilution to jump up to 15%. With a market capitalization of more than $32 billion, eBay hardly seems to qualify as a small-cap company. Regardless, its potential dilution tops that cap as well.

Likewise, Vanguard's rules instruct its managers to vote against stock plans when the total dilution resulting from those plans reaches more than 15% of outstanding shares. Vanguard guidelines also state that the company opposes stock plans when a company's annual options grants have exceeded 2% of outstanding shares.

eBay's average options grant has amounted to about 4.8% of outstanding shares over the last three years, according to the IRRC.

eBay's plan appears to violate other guidelines set by Fidelity and Vanguard as well.