(CSCO) - Get Report

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


(MSFT) - Get Report

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.

Long one of the strongest supporters and biggest recipients of stock options, Chambers isn't exactly facing much hardship. The San Jose executive has racked up 17.5 million shares underlying options grants in the past three years and, as of last week, has cashed in $56.9 million in options over nine months.

It's little surprise that Chambers has so far successfully battled accounting reformers who argue that companies like Cisco should treat stock options as expenses when reporting GAAP earnings. By those standards, Cisco's net income would have been slashed by $311 million or 26% for the third quarter ended in April. And investors wouldn't look kindly on options tolls hitting the bottom line and undercutting Cisco's stock, already at deflated levels.

The effort to expense options, drafted by the Financial Accounting Standards Board, got sidetracked this summer. Expensing was to be mandatory by mid-December, but the House passed a bill tinkering with the FASB rules. Now the Senate banking committee is mulling it over, and few expect the bill in its current form to reach a Senate vote soon.

Perhaps a thornier options issue for Cisco is the amount of cash the company has siphoned back to employees through options via stock repurchasing

Since the company's buyback program started in September 2001, Cisco has spent $16.9 billion on the repurchase of 956 million shares. But during that period, the company's total share count has dropped by only 400 million shares, thanks in large part to heavy employee stock issuance.

Meanwhile, the company has been generating about $2 billion a quarter in cash but, because of the hefty repurchasing program, the company's cash pile of about $20 billion hasn't changed much in recent years.

"This underscores the fact that the use of stock options has made it extremely difficult for investors to assess the underlying earnings power and cash generating ability of a company," says Cisco options critic Albert Meyer with 2nd Opinion Research.

Since nearly every dollar of cash generated each quarter goes to stock buyback, Meyer and others have charged that Cisco's repurchase program end up supporting employees through stock-based compensation, at the expense of public shareholders.

Cisco representatives defend buybacks as the best use of the company's cash. And they have pointed out that about 80% of the company's stock options are held by employees below the level of vice president.

Still, critics say pay -- executive and employee alike -- should be treated as an expense.

"Issuing coupons to employees to keep wages from hurting the bottom line, then redeeming the coupons through the financial section of the cash flow statement ... what a deception," says accounting watchdog Meyer.