Cisco Keeps Running Same Options Play

Cisco (CSCO) thumbed its nose at reformers and bucked tech fashion this week, expanding its employee stock option plan by 15%.

Reigniting debates over the company's options addiction, the computer networking giant says it will issue 162 million shares underlying employee stock options. That marks a sharp increase over last year's 141 million-share plan, a shift that is taking some observers by surprise.

The move comes as Wall Street types take an increasingly bearish stance on options, which have come under fire for giving execs an incentive to boost performance now at the expense of a company's long-term health. Tech leaders such as Microsoft (MSFT) have backed away from options altogether, preferring stock awards in the name of better aligning shareholder and executive interests.

Some analysts responded by deducting the possible dilution from their Cisco earnings estimates, prompting investors to push the stock down 29 cents to $18.89 Tuesday.

"We were anticipating a lower option grant in our valuation for Cisco," UBS analyst Nikos Theodosopoulos wrote in a research note Tuesday. He rates Cisco a neutral.

"We view the increase in total options, options per employee and dilution as slightly negative for Cisco given the increased concern on stock option expensing heading into 2005," wrote Theodosopoulos, who trimmed his 2005 stock option-expensed earnings forecast by 4 cents to 78 cents per share.

In one concession to the growing scrutiny on fat cat executives lapping up the stock-compensation cream, Cisco dangled a much smaller prize in front of CEO John Chambers. Chambers was awarded a mere 1.5 million shares this time around and new rules stipulate that he cannot touch the loot for seven years -- three if he leaves the CEO post before then.

Cisco says Chambers received no stock option grants last year and only recently did the executive have his $350,000 salary reinstated after forgoing all but $1 a year during the tech gloom.