Expectations Investing

84 implementing the process

2000 (table 5-4). However, fiscal 2000 was probably an outlier, as the

company gave employees an unusually large grant in an effort to boost

morale in the midst of the company’s legal imbroglio with the Justice

Department. Excluding year 2000, the average annual cost was about 5

percent of sales.We can use this past cost—which properly incorporates

option cancellations—as an estimate for future costs of ESO grants.

Naturally, option-based compensation is often very high for start-

up companies as they build their executive teams. So simple extrapola-

tions of brief historical results (as the Microsoft data emphasize) can be ...