Options are fun when you get a friend to play!

MacJournals News responds to the Macalope’s response to their post about Mark Anderson’s post about Apple’s stock options.

The game is afoot! Let the response to the response to the response to the response to someone else’s post begin!

So MJN did not miss the point as the Macalope said, so much as it chose to discount it.

MJN also provides some history on Graef Crystal and seems think he’s largely just interested in bashing Apple executives as being overpaid. Indeed, Crystal does engage in some truly tasteless construction.

Apparently, an option of that size didn’t stir Jobs to new heights of performance. On the contrary, he fell on his face, with the stock price plummeting to $18.30 a share by Oct. 19, 2001.

It was on that latter date that Apple’s board decided that he needed more motivation. So he was handed a second option grant, this one covering 7.5 million shares and carrying a strike price of $18.30.

Hmm. Why would that be? Well, it could have something to do with the iPod, which was announced on…

October 23, 2001.



Starting an entirely new line of business, the company might have decided Jobs needed to have his compensation structure tied to that. And, of course, in retrospect Crystal’s caterwauling about Jobs’ performance is pretty embarrassing.

Give Steve a minute, dude. He’s just warming up.

So the Macalope will concede that the messenger has an agenda, but from what he’s read, it comes from a general dislike of large compensation packages for corporate execs, not a dislike of Apple per se. Also, it doesn’t mean he’s wrong about everything.

Such as how the company valued the shares Jobs received in March of 2003 in exchange for his options.

MJN’s believes that, because Steve Jobs can’t trade his stock options to anyone, they’re worth nothing.

Jobs was not “given the present value for the options in March 2003 using an industry-standard means of calculation” anywhere but in Graef Crystal-world, where he’s been inventing fantasy numbers for Jobs’ compensation since 2000.

Crystal and other critics continually try to value Jobs’ options using the Black-Scholes method of determining the present value of a future asset.

Uh, that’s probably because it’s an industry-standard means of calculating the present value of stock options.

Well, you keep saying that, Macalope, but how “industry-standard” is it?

It’s so industry-standard it was one of the two models that the Financial Accounting Standards Board (the accounting rule makers in the U.S.) had proposed should be required for calculating how to expense stock options when they tried to make that the law of the land in the early 1990s (before congress gallantly stepped in and insisted that options not be required to be expensed).

It’s also so industry-standard that a 2002 Ernst and Young report (PDF) said:

As indicated in our past surveys, the overwhelming majority of companies use the Black-Scholes option-pricing model for determining the fair value of employee stock options. A small minority of companies uses the binomial pricing model.

So, that’s how industry-standard it is.

Thanks for asking, Billy.

That was Billy, the artificial argument construct, ladies and gentlemen. Let’s give him a hand.

[Yay, Billy!]

Now, one could argue it’s not the right model to use. Indeed, it has since been seen as having the tendency to overvalue the options and the FASB has advised companies take care in using it. But it’s still the primary one that has been used at least until recently and not just by people who want to beat Steve Jobs over the head as MJN implies.

But as experts like Crystal continually refuse to tell their readers, Jobs can’t trade his stock options. If they’re worth US$523 million, they’re worth that only to Steve Jobs [in his own personal satisfaction]. Apple employees and directors cannot transfer their stock options; they can only sell the shares themselves once the stock options are exercised. Remember that: those 27,500,000 shares are worth exactly US$0 to anyone other than Steve Jobs.

Actually, that’s not true. They’re also worth something to Apple and consequently its shareholders. And the reason experts “refuse to tell their readers that Jobs can’t trade his stock options” is probably because it seems so darned obvious.

MJN, the Macalope is left to surmise, believes Apple took the options back solely to reduce exposure and then gave Jobs an unrelated $75 million for his troubles, a number the company just pulled out of its ass*.

Their value on the “open market” is manifestly irrelevant because they could not be traded on the open market.

This is absurd. The options’ value is tied to Apple’s stock which is traded on the open market. If Apple had had to expense the options (which, ironically, is pretty much exactly what they ended up doing by allowing Jobs to trade them in for directly-owned stock), it would have valued them based on either the Black-Scholes model or the binomial model and expensed that amount.

It’s perfectly possible that Crystal botched one or both of his calculations of Jobs’ options (as MJN shows, he came up with two different numbers) or that he used different inputs for the model each time, either based on better information the second time or a desire to get it to come out closer to $75 million.

To quote Monty Python, “It’s only a model.” The results are going to vary drastically depending on the inputs (and the competency and intentions of the modeler). As for Crystal’s numbers, it’s probably best to point out that one could get those results from the Black-Scholes model and Occam’s razor being what it is…

The Macalope would fall down dead, his hooves sticking straight up in the air if he were to find that Apple didn’t derive the $75 million figure by modeling the present value of Jobs’ options in March of 2003. And he thinks it’s highly likely the company used the Black-Scholes model.

It’s an industry standard, don’t you know. Just ask Billy.

The Macalope’s only real error below is that he failed to add a qualifier such as “highly likely” to his comment that Jobs was given the present cost based on an industry-standard model.

It is theoretically possible Apple just pulled the number out of its ass. It’s just really unlikely.

* The use of “pulled the number out of its ass” in this piece is a deliberate exaggeration.

Trackbacks Comments
  • OK, I realise this is a serious topic, especially so with it being a response to a response to a response to an article and all…

    However… dude….. you managed to utilise, in a potentially correct, yet humourous manner, the word ‘caterwauling’.

    The Macalope truly transcends all those who have blogged before himherit.

    To misquote Mr Gruber:

    ‘If I knew what the hell The Macalope was, I’d buy it a beer… assuming, of course, that whatever it was actually drank beer. Or could otherwise ingest/absorb beer.”

    … or something.

    Now, what are the chances you can slip ‘transmogrify’ into your next post?

    Mr Jamieson.

  • Rauser:

    “It’s only a model.” SSSHHHHH!!!

  • for the first time … I must congratulate you on a well written well researched piece – I think you are the first to point out that Jobs received the new options right after the iPod introduction…that’s intriguing to say the least

  • reinharden:

    A couple of things to look at.

    1) In the initial large grant, Apple announced the grant the following week and stated that the grant had been given “a week ago”. This was the low point; however, the announcement was made the same day that they announced earnings and a few days after a disappointing MacWorld. It doesn’t smack of back-dating, it smacks of the day that the board of directors met, was apprised of the coming quarterly report, and approved the compensation package.

    2) Steve really screwed up when he traded his options in. Go do the math and you’ll find that had he kept his underwater options package, he’d currently gross over 3 *BILLION* dollars. Trading the options in ended up costing him 2 *BILLION* dollars. And that would have moved him several slots hire on the billionaires list. 😉


  • 1) That’s actually not at all exculpatory. In addition to backdating, there’s another practice called “spring-loading.” In this, the company sets the strike price to a date just before an announcement that is expected to cause the stock to rise. Apple was delivering relatively good news at the January 19th call with analysts.

    2) That’s true. The Macalope doesn’t think the move was made to fatten Steve’s wallet. It was done to get the options off the books. Even so, Jobs was given the present value for the options at the time.

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