For Omnivision and Palm, Stock Compensation Eats Up Earnings

United Health (UNH) and Pfizer (PFE) made media headlines for giving their (former) CEOs huge compensation packages. Hank McKinnell got a $83 million check when he walked out of the CEO's office at Pfizer. William McGuire's total compensation while at Unitedhealth was estimated at around a billion, including stock gains.

This is all great and fine for the headlines, but how much does it matter? The growing split between CEO and rank and file pay is alarming from a social perspective. But in the two cases above, the amounts are not significant to the company's shareholders. McKinnell's $83 million exit check, for example, amounts to a little over a penny a share pre-tax for Pfizer shareholders.

Where stock compensation truly effects shareholders is with smaller companies, especially small technology businesses.

Take Omnivision Technologies (OVTI). The company just reported disappointing results for the fiscal 2nd quarter, and shares are off big. What caught my eye, however, was the incredible effect that stock compensation has on earnings. For the 3rd quarter, Omnivision is expecting net of 5 to 12 cents. Excluding stock compensation expense, net is expected to come in at 16 to 23 cents per share. This means that stock expense will eat up from half to over two-thirds of reported earnings. Bear in mind that earnings are expected to be weak, which means stock compensation eats up a bigger chunk of a smaller pie. But even if the co were to earn what they earned in last year's 3rd quarter, stock compensation would eat up 20% of earnings.

Or take Palm (PALM). For 1Q07, stock compensation knocked earnings down nearly 30%.

Even non-tech staffing firm Labor Ready estimates that 10-12% of earnings are eaten up by stock compensation expense.

Social arguments aside, smaller company executives eat up a much bigger slice of the pie than do executives at bigger companies.

Disclosure: I beneficially own shares of Pfizer, Labor Ready and Palm.