One of my favorite sites for research and general information is footnoted.org. The site is updated on a near-daily basis with some little tidbit of info you'd find only by reading the footnotes of a company's financial statements. The author of the site, Michelle Leder, is also the author of the book Financial Fine Print, which is worth reading if you're at all interested in digging through the footnotes of companies.
Yesterday, while out surfing the Web, I came across a mention on the footnoted site about Ariba (NASDAQ:ARBA) and its recent stock option exchange program. The program allowed all employees, including executives, to exchange their stock options valued above $10 per share for restricted stock. As disturbing as the large option grants at ATI Technologies (NASDAQ:ATYT) can be, this is worse.
I'm against option exchange programs in general, because options are a reward for performance. If they need to be exchanged, that's a key indicator that the performance of the entire group wasn't there. Arguments can be made that it's necessary to reward employees to keep them happy, not to mention at their desks, but that's what additional future option grants are for. If the previously issued options don't work out, that's too bad, but if you perform, you'll get more at a future price that will likely be lower.
What makes the Ariba exchange so interesting and egregious is that the company hasn't generated $1 of free cash flow since 2001. As a reward for that performance, executives turned in more than 2 million options valued at prices above $10 a share for more than 900,000 restricted shares that vest over three years.
Shareholders who have stayed with the company and believed in its long-term potential have now watched management take a do-over on a portion of their past compensation that didn't work out as management desired. Given the performance of the business over the time frame, that's just wrong.
For more options on stock options, see related Foolishness:
Nathan Parmelee has no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
