We're all familiar with tech companies such as Broadcom (Nasdaq: BRCM), Dell (Nasdaq: DELL), Cisco (Nasdaq: CSCO), and Intel (Nasdaq: INTC) granting lots of options. Now that companies are legally required to report stock-based compensation as an expense on their income statement, the average investor can see that their favorite eateries are also in on the act. CBRLGroup (Nasdaq: CBRL), which operates Cracker Barrel and Logan's Roadhouse; McDonald's (NYSE: MCD); OSIRestaurant Partners (NYSE: OSI), which operates Outback Steakhouse; and Yum! Brands (NYSE: YUM), which runs Kentucky Fried Chicken and Pizza Hut, among others, have all been using stock-based compensation for their employees and top management.
This table shows how options expenses really affect earnings:
|
Company
|
Non-GAAP earnings*
(latest quarter)
|
GAAP earnings**
(latest quarter)
|
% change
|
|
CBRL
Group
|
$0.50
|
$0.47
|
- 6
|
|
McDonald's
|
$0.52
|
$0.49
|
-5.8
|
|
OSI
|
$0.51
|
$0.43
|
-15.7
|
|
Yum! Brands
|
$0.63
|
$0.59
|
-6.3
|
|
|
Broadcom
|
$0.36
|
$0.22
|
-38.9
|
|
Cisco
|
$0.25
|
$0.22
|
-12
|
|
Dell
|
$0.36
|
$0.33
|
-8.3
|
|
Intel
|
$0.27
|
$0.23
|
-14.8
|
*After adding in reported stock-based compensation to earnings based on generally accepted accounting principles, per diluted share
** As reported, per diluted share
We see that earnings decline less because of stock options expense at the restaurants than at the tech companies highlighted. However, there is undoubtedly a significant loss of earnings for the restaurants because of such compensation. You may question why I'm bringing this up -- it's only 8% on average, after all. But even 8% translates into millions of dollars in compensation for a relatively small number of people.
Many companies, including restaurants, have been using this previously invisible way of compensating some of their employees. Tech companies, longtime foes of the SFAS 123R rule, argued that options were needed to hire and keep good employees and managers. That may be fine when you're a rapidly growing company trying to get the best talent out there to become profitable. Is it really necessary, though, if you are an established, profitable restaurant chain? Restaurants sell a commodity, so I fail to see how one must lure the "best" managers with stock-based compensation.
In my opinion, using options and other stock-based compensation is not shareholder-friendly. Not only does it transfer wealth from shareholders to option-holders, but the chance to maximize the amount of money gained from exercising and selling them has also been too strong a temptation for some. Witness the current scandal of backdating options, or the established practice of repricing options when they fall out of the money. Under those situations, option-holders bear significantly less risk than stockholders.
Should stock-based compensation be banned? That's an interesting topic for debate. I think it's probably fine for alternative compensation when a company is starting out and is strapped for cash. However, more mature companies, such as profitable restaurants like those above, have better ways to compensate employees and management without taking value away from the shareholders who truly own the company.
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Fool contributor Jim Mueller is always on the lookout for new places to eat. If you email him, be sure to include the name of your favorite restaurant. He owns shares in Dell and Intel, but no other company mentioned. Take time to digest the Fool's disclosure policy.
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