Compensation

I bought some ARXX for a swing-type trade but just noticed that the CEO exercised 14 million in stock options last year and this year was awarded another 35 million! (Nobody's that good if you ask me...where's Buffett when you need him?)

This is almost equal to earnings. What I am wondering if the cash for these options is usually reserved ahead-of-time and therefore already pulled out of earnings? Or will ARXX probably get hit with a huge slam to earnings whenever he exercises his options?

Thanks.

 

My memory might be a bit sketchy is this area, but here's what i can recall;

1) stock options are generally referred to in shares as opposed to cash - i can't tell from your question whether or not you might be confusing the two, so just in case, i would point this out;
2) The cash generated from the excercise of employee options is a cash inflow to the company, in and of itself having no direct bearing on the income statement other than a possible increase to net interest income should this cash be put in the bank, for instance;
3) The income statement will be directly influenced by an accrual to compensation expense, which as i recall is calculated as the amortization of the net excess value of the option when granted as compared to the market value of the option at the time of the grant; Thus, generally speaking, the TIMING of the CEO's future option exercise has no material relevance with respect to EPS calculations, as the cost has already been accrued.
4) and finally, the average share count used to determine EPS can be influenced, via the treasury method, based on the # of options granted and the current or average share price. (basically, if the stock price goes up, the # of average outstanding shares also goes up irrespective of additional option grants.)

So yes, option grants do have a direct impact on a company's EPS, beginning at the time of the grant, not at the time of exercise. The calculation of this impact requires a lot more information which may or may not be available in documents filed with the SEC (ie., 10Q's, or 10K's). But to address your question directly, the exercise of the CEO's options will not have a significant one time impact to EPS, as you fear. It may not be a bad idea to email or call ARXX's Investor Relations Department if you still have questions, or if you want to try to determine the exact impact of the option grant.

Good Luck,
Mav

 

shoe,

I swing trade ARXX as well.

It is a very good company fundamentally. I hope you're short?

Good Luck!!!

 

Thanks - that helps tremendously. I COMPLETELY misunderstood the accounting part of it - although I still don't believe he deserves that kind of money...