eBay Vote Shows a Return to Complacency

While institutional investors were buying, eBay insiders were selling. Last year, after cashing in options estimated to be worth more than the company's net income, eBay employees sold off some $129 million worth of stock options in the first quarter of this year. That works out to be about $32,300 per employee just for the quarter.

Meanwhile, in the first five months of this year, the company's directors and executives sold about 1.7 million shares of stock or options, reaping some $116.4 million in gains. CEO Meg Whitman alone realized some $57.3 million through the sale of about 685,000 shares.

For weeks, corporate governance experts warned investors that eBay was dispensing an excessive amount of stock options to executives and employees. Last year, for instance, eBay gave out a net option grant equivalent to about 4% of its outstanding shares. That was a far higher percentage than at such companies as Cisco(CSCO Quote), Yahoo!(YHOO Quote), Amazon(AMZN Quote) or Siebel(SEBL Quote), which were all known for their big option awards.

Stock options have drawn particular scrutiny in the wake of the accounting scandals. Because the options are valuable only if a company's stock price appreciates, critics have linked their use to short-term strategies and accounting gimmicks used to pump up stocks.

Additionally, because many companies don't recognize the expense of stock options, critics have charged that companies have used them as if they were free, in the process diluting shareholders' equity.

Ignored Warnings

In reaction to these concerns, regulators have forced companies to note every quarter how their earnings would look if they had to expense stock options. And beginning next year, regulators are likely to require companies to include options expenses on their reported bottom lines.

Bowing to investor distaste and the threat of government intervention, companies such as Coca-Cola(KO Quote) and Amazon already have begun to voluntarily expense stock options. Other companies, such as Yahoo! and Intel(INTC Quote), have pledged to limit their use.

In contrast, eBay has neither expensed stock options nor curtailed its distribution of them.