Some people think the fat cats are lapping up too much of the cream at

Cisco

(CSCO) - Get Report

.

Tech investors have marked off Wednesday afternoon on their calendars, in honor of the company's widely anticipated fiscal first-quarter earnings release. But another date looms equally large for Cisco shareholders: next Tuesday, when they will vote on whether to expand the San Jose-based communications giant's costly employee stock plan.

Skeptical analysts have long criticized the company's liberal use of stock-based compensation -- particularly options. These people charge that, in effect, the proceeds of the Cisco cash machine have been funneled into the pockets of well-compensated insiders at the expense of outside investors. The jeers have only picked up as other tech titans have moved away from using options to pay workers.

Options aside, some 321 million shares have been issued already for Cisco's employee stock plan, which offers qualified workers a 15% discount on share purchases. Now, as Cisco stockholders consider a proposal that would expand that pool by a hundred million shares and extend the program through 2010, these critics are saying it's time to bring the milk wagon to a halt.

Adding stock now to an employee pay plan that has already includes millions upon millions of shares may seem like a drop in the bucket. But "it's a drop in an overflowing bucket," says CEO Greg Taxin of shareholder advocate Glass Lewis, which opposes Cisco's plan.

Cisco declined to comment on the Glass Lewis remarks, which were issued last week in a proxy paper. Shares of the computer networking giant rose 66 cents Monday, to $21.59.

Leadership

Cisco has become tech's strongest defender of using stock -- especially options -- to pay employees, even as peers such as

Microsoft

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have curbed the use of options in favor of restricted stock grants.

Advocates of the shift to restricted stock say it better aligns workers' interests with those of shareholders, while potentially reducing the dilutive effect of massive option grants. They also point out that stock grants, unlike option grants, can retain value even in a falling market.

Cisco reps have staunchly defended their practice, though, contending that a recently

beefed-up stock buyback program has helped neutralize the dilutive effects of employee stock-compensation issuance.

Still, critics charge that in issuing new shares for employees and allocating more money to buy back old ones, the company is basically robbing shareowners to overpay bigwigs.

"Investors buying stock in companies with huge stock option programs are not investors, they are paymasters," says accounting watchdog Albert Meyer with 2nd Opinion Research. "Those who bought Cisco stock between 1998 and 2001 were not investing. They were merely paying someone else's wages, Cisco employees to be exact."

More to the point, they were paying some Cisco employees' wages more than others.

Cisco's chief proponent of stock compensation has been CEO John Chambers, who holds options on 30 million shares personally and has chosen to take option grants in lieu of a salary for two years.

Chambers' paper riches aside, Cisco says about 80% of the company's stock options are held by employees below the level of vice president. But the average strike price for those options is about $25 -- which is still underwater even after the stock's sharp rise this year.

Murder by Numbers

Cisco generates over $1 billion in cash per quarter. But even with that big inflow, the company's total cash pile has remained static for the past four years. Tellingly, though Cisco has spent a staggering $7.8 billion on buybacks since 2001, the networker's share count has been largely unchanged over those four years.

By Meyer's calculation, Cisco must spend an added $5 billion on buybacks before it will have completely mopped up the dilution from the 786 million shares it has issued to employees since 1998.

At this rate, if the numbers are right, "in order to maintain the current number of shares outstanding, Cisco's going to have to drop $3.3 billion or so per year" in stock buybacks, says Charles Cocke, an analyst with the University of Virginia Investment Management, who has no Cisco positions.

On top of those staggering figures comes the proposed increase, which would add $1.3 billion to Cisco's stock-compensation costs. Those expenses would make Cisco's costs nearly three times industry norms on a per-employee basis, according to the Glass Lewis report. And with Cisco's cost of employee stock compensation already running at about $3.1 billion annually -- equal to more than 80% of last year's profit -- Glass Lewis recommends that shareholders vote down the increase.

"It's a shell game," says Taxin of Glass Lewis. "Cisco is paying out cash every quarter through its buyback plan to compensate employees. But this isn't going to appear on the income statement, because the check wasn't written directly to John T. Chambers."

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