eBay Wants More Options but Balks on Expensing

In a proxy filing, the online auctioneer asks for 24 million more shares for employees but punts on accounting.
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Updated from 7:04 p.m. EDT

When it comes to stock options, it seems

eBay

's

(EBAY) - Get Report

mantra is "ask, but don't tell."

One year after shareholders approved a massive expansion in its pool of stock options, eBay is asking for more. But the company doesn't want to tell shareholders directly how much its options program is costing them.

Those contrasting positions were revealed in eBay's preliminary proxy statement, filed with the

Securities and Exchange Commission

Wednesday evening. The company's directors argued that stock options are an "essential" part of its compensation program.

"We grant options to substantially all employees and believe that this broad-based program helps us to attract, motivate, and retain high-quality employees, to the ultimate benefit of our stockholders," the company's directors said in the proxy statement.

But noting that accounting regulators have not yet approved a final standard rule on expensing stock options, the board argued that it's too soon to voluntarily recognize options charges.

"We believe that recognizing an expense for the estimated stock option value would make our financial statements less accurate and less comparable to those of companies that do not expense options," the board declared. "Accordingly, we do not believe it would be in our stockholders' best interest to adopt a policy of expensing stock options prior to issuance of a final standard."

eBay representatives did not return a call seeking additional comment.

In opposing options expensing, eBay's management is asking the company's owners to go against the advice of accounting experts, SEC Chairman William Donaldson and legendary investor Warren Buffett, among others, noted Ken Broad, a portfolio manager at Transamerica Investment Management. "It's appalling to me."

The company would like shareholders to approve two separate proposals that would amend its two stock options plans. Basically, eBay wants to raise the combined available pool of options under the two different plans by 24 million shares. If approved, the increase would push up the options pool as a portion of outstanding shares by 3.7 percentage points to a whopping 18.6%.

eBay wants to increase the options available under its 1999 plan, which is targeted at the company's overseas employees and consultants, by 6 million shares to a total pool of 26 million. The company wants to up the options available under its broader-based 2001 plan by 18 million shares to 96 million. The proposals represent a 24% increase of the company's current combined options pool.

Last year, shareholders

approved an increase of 28 million split-adjusted shares in eBay's 2001 plan. Although that increase amounted to more than 4% of the company's outstanding shares at the time, eBay said it has just 17 million shares left available under that plan.

Last year, the company awarded a net grant of 20.99 million options to employees and executives. That grant, which excludes canceled options, was equivalent to 3.4% of outstanding shares at the beginning of the year.

The largesse has proved costly to the company -- or would be, if the company recognized the expense of stock options in its income statement. Had the company included options expenses, it would have earned $201.78 million, or 37 cents a share, last year. Instead, the company reported earnings of $441.77 million, or 67 cents a share.

For a company that is currently trading at more than 77 times its projected 2005 earnings -- a projection that excludes options expenses -- that difference could have a huge impact on its stock price, which may explain the company's opposition to a shareholder proposal urging the company to recognize options expenses.

eBay, like many other technology and Internet companies, excludes the cost of options from its income statement. Instead, taking advantage of current accounting rules, the company merely estimates its options costs in a footnote buried within its quarterly and annual reports.

In its proposal, the International Brotherhood of Electrical Workers Pension Benefit Fund, which owns some 57,550 shares of eBay, argues that eBay should follow in the footsteps of companies such as

Microsoft

(MSFT) - Get Report

and

Amazon.com

(AMZN) - Get Report

that have voluntarily chosen to recognize options expenses.

"We believe that expensing stock options would more accurately reflect a company's operational earnings," the IBEW said in the proxy statement. "We believe that the lack of option expensing can promote excessive use of options in a company's compensation plans, obscure and understate the cost of executive compensation and promote the pursuit of corporate strategies designed to promote short-term stock price rather than long-term corporate value."

Over the objections of eBay's Silicon Valley brethren, accounting regulators have

proposed that all companies begin recognizing options expenses next year. Although the proposal faces

opposition on Capitol Hill, accounting experts expect it to be adopted later this year.

While the proposal does not specify how companies should estimate options expenses, it does recommend that they use the so-called binomial method.

Despite the growing consensus on options and the likely rule change, eBay's directors argued that the company should maintain its status quo until the new rules go into effect.

After hours, eBay shares were recently down 27 cents, or 0.3%, to $82.60; the stock ended Wednesday's regular session up 14 cents, or 0.2%, to $82.87.