Them Apples and Liking Them
Wed, 31 Oct 2001 08:58:56 EST

In a message dated 10/30/2001 8:39:13 PM, writes:

> I said he took enough boni and options to devalue his stockholders' 

in which she was quite right. Quoting myself in 1999:

The Dell business model--based on ultra-lean, build-to-order manufacturing 
and zippy information systems--is one of the great   business successes of 
the Information Age. Actually, the   underlying principle is as old as the 
sun: Business is much more  fun when played with other people's money. Dell 
operates with  negative working capital. That is, it gets its customers' 
money  before it pays its suppliers; like a bank, the company profits  from 
the float. 

               Dell's board of directors also seems taken with the idea of 
using  other people's money and putting it to a different use: to ice  the 
financial cake of its fabulously wealthy chairman and  founder, Michael Dell. 
Dell, who is 34 and gives "rich Texan" a   new definition, owns 364,978,212 
shares of Dell stock, including   exercisable options; his wife and two 
trusts they control own   49,507,712 more shares. The total family stash, 
414,485,924  shares, was worth $15,128,736,226 as of June 30, when the stock  
 closed at $37. Last year Dell took home $844,231 in salary, $2.6   million 
in bonuses, $11,615 in other compensation--and was awarded  12,800,000 stock 

               The salary and bonus aren't out of line by today's out-of-line 
  standards. It's the options that are odd. For each of the past  three 
years, Dell's compensation has included a 12.8  million-share grant of stock 
options (adjusted for splits). That's a whole lot of options. It's also a 
huge percentage: Last   year Dell received 21% of all the stock options 
granted by the   company to its employees. The year before, the board cut him 
  14.5% of the pie. Vice chairmen Morton Topfer and Kevin Rollins,   by 
contrast, received options for 259,540 shares each; they were   also 
permitted to take their bonuses in options rather than cash  and did 
so--628,064 options for Topfer and 354,584 for Rollins.   They paid for them 
with their bonus checks; Michael Dell's 12.8  million options were 
out-and-out grants. 

               Why? The purpose of stock options is to give managers the  
incentive to think like owners. Says Pearl Meyer, the   compensation 
consultant: "Stock options were created to align the  interests of executives 
with those of shareholders through the  opportunity to acquire company stock 
on a favorable basis." But  Michael Dell already is the owner. He founded the 
company. He   owns 14.3% of its stock. 

               Founder-entrepreneurs, such as Microsoft's Bill Gates and's Jeff Bezos, figure they're already aligned with  their own 
self-interest and don't get stock options. (Others,  including Ted Turner, 
vice chairman of Time Warner, the parent of FORTUNE's publisher, do take 

               If Dell is already an owner, maybe his compensation package is 
 designed to make him think more like a hired hand. That's actually the 
argument put forward by the company's spokesman,   T.R. Reed. He says his 
boss earns his options because "his job as  CEO and chairman has nothing to 
do with his ownership. He is a  high-achieving executive who comes to work 
every day." Oh. 

               It gets worse. 

               While he is receiving options, Dell is also selling his Dell  
stock--eight million shares in 1998. "He sells every quarter,"  says Reed, 
for a simple reason:  "Diversification." It's an  ordinary and sensible thing 
to do. Gates sells Microsoft all the time. It's unwise to keep all your eggs 
in one basket, even if that basket is Dell Computer, if for no other reason 
than to  guard against the volatility that has, recently, bounced the stock 
from $55 into the 20s and back to its current price. 

               But why is Michael Dell, wearing his founder's hat, selling  
stock, while in his managerial garb he sucks up so many options? He has 
actually been getting options to buy more shares than he has sold--60% more 
last year. So he gets to pocket the proceeds  from his stock sales while also 
being awarded the right--as the   options vest--to increase his stake. Sure, 
he'll have to pay the  strike price on the options. And sure, there's no 
guarantee that  his options will end up in the money. Dell stock might, just  
might, be worth less in ten years than it's worth now. But the  options are a 
risk-free bet with a huge upside. If Dell goes up,  Mr. Dell misses out on 
the appreciation for the eight million  shares he sold--but he gets to pocket 
a capital gain on 12.8   million shares. If the stock goes down, the options 
are worthless--but he will have avoided any loss by having sold the  stock 
when it was higher. 

               This heads-I-win, tails-I-win-more bet costs Michael Dell  
nothing. Ordinary shareholders pay for it. The cost of stock  options doesn't 
appear on income statements, but it is real. By   issuing options, 
shareholders dilute their ownership. In Dell  Computer's case, for the fiscal 
year that ended Jan. 29, the   dilution reduced earnings per share by five 
cents; that is,              Dell's ordinary shareholders gave 8.6% of their 
earnings to    recipients of stock options. A piece of that is their  
contribution to the founder's portfolio-diversification fund: They get a 
lower return because he gets options; his option stock   replaces the shares 
he sells to diversify. Clearly Michael Dell  can afford to diversify his own 
portfolio--but hey, why do that   when you can use other people's money?