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Businesses The Almighty Buck

Should Companies Expense Stock Options? 418

Posted by michael
from the lottery-ticket dept.
A reader writes : "The New York Times is running a story about proposed accounting changes to force companies to expense stock options. Is this a necessary and proper oversight measure to enforce financial discipline on companies that might otherwise have none? Or would this measure basically stop companies from offering fiduciary responsibility incentives to their employees? What do you think about this? What should the final decision be? And what measures should be taken to influence the decision-making process?"
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Should Companies Expense Stock Options?

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  • by Anonymous Coward on Sunday June 27, 2004 @03:05PM (#9545238)
    How is the offer of options a "fiduciary responsibility incentive"? With an option, you have no downside, so you have an incentive to gamble all the firm's money on producing a temporary rise in the stock price.

    Perhaps this was a typo for "fiduciary irresponsibility incentives"?
    • by fname (199759) on Sunday June 27, 2004 @03:50PM (#9545549) Journal
      Ya, I thought the same thing. It forces one to question if the submitter even understands what an option is.

      I've had long discussions about options with my friends. I finally realized the only sensible objection to stock options. And that is they have no impact on the cash position of the company. When a company is small or newly founded, it doesn't really make sense to value options, as at that point the cash poisition of the company is the overriding concern; this allows start-ups to offer compensation that, while not equal to that of larger companies, offers a tremendous possible upside to employes. Once cash flow is no longer really concern, it's convenient to continue to give options, as it doesn't count against the income statement. At this point, Warren Buffet's words quoted elsehwere (if options aren't compensation, what are they; don't we expense compensation?).

      In short, options for start-ups make sense, and no one really cares what the GAAP earnings are-- cash flow is much more important. For established companies, cash flow is often difficult to relate to the success of a company, so using GAAP earnings makes sense, and options should be expensed. And I have no idea what "fiduciary responsibility incentives" are, and the submitter doesn't either.
      • Stock options do impact the cash position of a company, but not in the way you think.

        In privately held companies, stock is issued depending on the perceived value of the company and what monies investors have put up. While there is no true value, this stock is an indication of what percentage an investor 'owns' in a company. If the company is sold, the proceeds are split up depending on the stock ownership. It is not uncommon in those instances too for all options to become immediatly vested, the same is

      • ...stock options. And that is they have no impact on the cash position of the company.

        Ah, but they do.

        Employees will take stock options in lieu of cash to some degree, so issuing stock options lowers the cost of paying employees wages here and now in this fiscal year.

        Then, in later years when the employees exercise their options, the other stockholders take in the shorts as the pool of shares dilutes their worth.

        In some ways, it's like issuing a bond but paid back in shares instead of cash when it fi

    • Consider SCO (Score:3, Insightful)

      by Nakito (702386)
      Indeed, there is no necessary correlation between a company's stock price and its profitability or even its value to society. SCO is a fine example. The factors that drive stock prices can be completely independent of the factors that drive profitability. If incentives were based on profit sharing, or sales, or other tangible positive values, instead of stock options, the incentive would be to make the company profitable rather that to drive up its stock price. Accordingly, stock options may well create an
      • Accordingly, stock options may well create an incentive to breach fiduciary duties rather than to support them.
        So would owning stock, then. I would rather executives have an investment in the company than not.
        • Re:Consider SCO (Score:5, Insightful)

          by Chazmyrr (145612) on Sunday June 27, 2004 @05:07PM (#9546004)
          I would rather they didn't. It leads to short term business practices that damage the company in the long term. The executives responsible have already cashed out and moved to another company before the negative consequences start to show in the bottom line.

          As an example, the corporation for which I work use to own a number of large facilities around the country. The land and buildings were owned outright so there were no loan payments to consider. A few years ago, all of the facilities were sold with the new owners granting a 20 year lease. This made the bottom line look really good that year. A few years later the rental expense is a significant impact that could have been avoided.

          The executives who made that decision don't care. They made millions from it. Many of them took offers from other companies.

          So, what's the solution? I don't know. I do know that executive stock programs have only made things worse.

    • by thrillseeker (518224) on Sunday June 27, 2004 @04:33PM (#9545806)
      How is the offer of options a "fiduciary responsibility incentive"? With an option, you have no downside, so you have an incentive to gamble all the firm's money on producing a temporary rise in the stock price.

      Options granted to employees are nearly always restricted in many fashions. For one thing, a percentage of the total grant is frequently vested over time - often 20% per year, giving a 5 year time period before fully vested. The company usually has the ability to call the options - that is, demand payment of the strike price - the average employee holding 20,000 options at $5 is probably going to be hard put to come up with $100,000 if demanded of him - most people would have to borrow on it, and you'll find few banks willing to loan against a privately held stock. The last time I checked, even a publicly held stock could only be borrowed against at 60% of market value. Many option holders would simply say "fergetaboutit" rather than go into debt on such a thing. Also, there may be peanlties associated with early "termination for fault" - i.e. you do something dumb and get fired and you lose all your stock options. Even once the options can be converted to tradeable shares, as a company insider many employees might be required to file public documents with the SEC announcing their intent to sell - now the world knows of their intent and can react accordingly.

      The whole debacle about expensing them is about the biggest irrelevant effort made in a decade by the Financial Accounting Standards Board. In a public company, any investor that knows the difference between a put and a call is going to have his own rule of thumb for the value of an option - after all the thing is simply a promise that a share may, if desired be purchased at some time in the future - it's got nothing to do with the present day financial health of a company, and is a very hazy factor in the future potential value of a company's shares.

      Expensing options is nothing but a big press deal - disclosure of options is all that is needed, and that is required to be done in publicly held companies already. A clear rule set of how they should be disclosed would be beneficial, but it seems no one is talking about that.

      • by Chazmyrr (145612) on Sunday June 27, 2004 @05:27PM (#9546111)
        The 5 year vesting often only applies to the lower ranks. Top level executives often receive options with either no or shorter vesting periods.

        But lets put that aside for a bit. The real problem is that not expensing options is far too easy to abuse. Company grants options for 50 million shares. When options are exercised, company issues 50 million more shares. This doesn't impact the company bottom line at all. There is still no expense incurred. The only measurable effect is that earnings per share goes down. Then after several years of this, the company takes a one time charge to repurchase the stock they issued to cover the options.

        That's not even taking into consideration the dilution of ownership caused by excessive option granting.
  • Accuracy (Score:3, Insightful)

    by BobPaul (710574) * on Sunday June 27, 2004 @03:06PM (#9545241) Journal
    Mr. Casey acknowledged that "perfect accuracy isn't possible." But he added that "lots of other things in accounting are impossible to measure with perfect accuracy."

    But at least other things in accounting can be measured with modest accuracy.
  • Well duh. (Score:5, Insightful)

    by Senator Bozo (792063) <gki149@yahoo.com> on Sunday June 27, 2004 @03:07PM (#9545250)
    Options dilute the value of the company stock, and since shareholders are the owners of a company it only makes sense to list them as expenses.
    • Depends. The company can of course buy stock from the market, trough a buy back program. That allows them to give covered options at very little cost, without any dilution of the stock that is out there.
    • No "duh" (Score:2, Interesting)

      by JohnQPublic (158027)
      Options are issued from an "options pool". In any company large enough to be subject to FASB rules, that pool has already been set aside for that purpose. The dilution happened to the early investors (angels, pre-VC folks, etc.), which it was a small private company.
      • Stock dilution (Score:3, Insightful)

        by nuggz (69912)
        Every single additional stock dilutes my share of the company.

        The only way to stop this is to buy back stock, which is a huge expense.
      • Yes "duh". (Score:5, Informative)

        by nodwick (716348) on Sunday June 27, 2004 @03:45PM (#9545526)
        Uh, no. Stock dilution happens because the number of outstanding shares changes. The earnings and growth numbers that are used to valuate shares are calculated per outstanding share, so any change in shares outstanding creates dilution. Look at any company's 10K or 10Q; they'll have two lines listing earnings per share (EPS) and diluted EPS separately for precisely this reason: diluted EPS is what the company would earn per share if all the options were suddenly exercised.

        The REAL issue with whether options should be expensed or not is whether the diluted EPS captures the full effects of dilution through options issuance, or if there are hidden costs. There's a non-zero "option value" to the options (the choice not to exercise if the stock price drops), that is distinct from the "intrinsic value" (roughly equal to the strike price minus the current price). The argument is that this is presently not captured in the accounting regulations.

        For more info on share dilution, check about.com's primer [about.com]. There's also a section in there on common tricks companies use to hide dilution effects [about.com].

    • Having read many of the posts here I understand why so many .coms went bust. The geeks running them didn't have the faintest concept of accounting...

      I oppose the expensing of options because there is often no good way to value them, particularly in the case of a startup offering them in lieu of cash (which is often where they do the most good from the business's point of view, and where rules requiring them to be expensed are likely to hurt the business's viability the most).

      Option grants and the associ
      • Black-Scholes assumes the options are traded on an open market, which usually isn't the case for options offered to employees.

        I agree that the full value of options shouldn't be expensed, where else in accounting are opportunity costs expensed out? Though I do think the original purchase of the stock for options needs to be recognized.
  • by nuggz (69912) on Sunday June 27, 2004 @03:11PM (#9545275) Homepage
    Yes it is a good idea to link company and employee performance. But when something is given the value must be recorded.

    Options have value, and people will pay for them. By giving them away the company is basically giving away money. To say there is no cost is not accurate, and the owners deserve to have the most accurate picture of comapny finances available.
    • IANACPA


      Options have value, and people will pay for them. By giving them away the company is basically giving away money. To say there is no cost is not accurate, and the owners deserve to have the most accurate picture of comapny finances available.


      The question is how you record them.

      No, they are not an expense when they are issued.

      No, they are not an equity when they are issued.

      Yes, they are an expense and an equity when they are excersized.

      Given the volitility of the stock market, what IS the ex
  • Taxes (Score:3, Interesting)

    by NineNine (235196) on Sunday June 27, 2004 @03:11PM (#9545281)
    While I'm not as knowlegeable about financials as I should be, wouldn't expensing options also give companies a massive tax break, too? Seems like they would. They'd hit the bottom line, but tax savings would be tremendous, which would offset some of the "loss" proposed by doing this.
    • No it makes no difference to their taxes.
      Its just a number reported on the company statement and accounted for in the profit figure. If you don't agree with it, just add it onto the profit to get the old number.

    • Re:Taxes (Score:4, Interesting)

      by Lupulack (3988) on Sunday June 27, 2004 @03:20PM (#9545345)

      Yes , the companies would get a tax break by this ( their taxable earnings would be lower ) , but a lower earnings would also drive their stock price down.



      Imagine the effect on stock price of everyone's favorite enormous software company if they were to report employee stock options as expenses. It would nearly wipe out their earnings , which would drive their stock price down precipitously. Which amusingly enough would also drive down the value of the stock options themselves ...

      • It wouldn't have much of an impact, since virtually every US company uses options, and they all would be affected equally. So relative to other companies, Microsoft would be in good shape, because while they do have a lot of options outstanding, they still have excellent, very steady earnings, and a sizeable amount of cash against neglibile debt. No matter how you cut it, Microsoft is still a blue chip stock, even though it's a relativly new company.
    • Re:Taxes (Score:2, Informative)

      by BigHungryJoe (737554)
      Book income is not the same thing as tax income. Most financial statements provide a note to the financials that detail the differences between the numbers.

      This would affect book income, not taxable income.
    • Re:Taxes (Score:3, Informative)

      Yes, you are correct NineNine, that their is a tax benefit. The only thing, is that tax benefit doesn't occur until the option is exercised, whereas the expense is to be recorded at the time of grant.

      Yours,

      Jordan
    • Astonishingly, the way stock options currently work is that they already count as tax deductions, without needing to be reported as expenses in the corporate report (as I understand it). That is, the company looks great to investors while stiffing the IRS. Many companies can show crazy profits while paying no taxes from clever use of options. For example: Enron. Or Microsoft.

      Here's a quote from Senator Carl Levin's website [senate.gov]:

      Senator Levin also pointed out how Enron had used stock options to avoid paying U

  • YES! (Score:3, Interesting)

    by Stile 65 (722451) on Sunday June 27, 2004 @03:13PM (#9545295) Homepage Journal
    Aside from the fact that expensing options makes for more accurate financial statements, it reduces a company's tax burden, thus making them more profitable in reality (rather than just on paper).

    I think it's a horribly dumb idea to pump up corporate profit on paper just so the tax man can take a bite bigger than your real profit out of your fake profit. I guess that's one of the problems with publicly traded corporations though - shareholders are often too uneducated to realize that long-term gain is more important than short-term illusion of profit.
    • by Otter (3800)
      I guess that's one of the problems with publicly traded corporations though - shareholders are often too uneducated to realize that long-term gain is more important than short-term illusion of profit.

      My impression is that this like "dolphin-safe" tuna. No company wants to stick their necks out to voluntarily take it on, but if it's universally forced on them from the outside, it affects everyone, everyone's balance sheet will take the same hit (more or less, especially when comparing within an industry) an

  • and it should be Federal law. otherwise, it is an unreported drain on companies' earnings and a dilution of the stock, screwing investors twice. three times, when you consider that the goons running these outfits think screwing investors twice in a row is OK, and you wonder what other scams they are running.
  • by Chris Mattern (191822) on Sunday June 27, 2004 @03:14PM (#9545303)
    The most incisive analysis of expensing stock options I ever heard was from Warren Buffett, who can surely claim to know what he's talking about in financial matters: "If options aren't a form of compensation, what are they? If compensation isn't an expense, what is it? And if expenses shouldn't go into the calculation of earnings, where in the world should they go?"

    Chris Mattern
    • by bnenning (58349) on Sunday June 27, 2004 @04:06PM (#9545663)
      The most incisive analysis of expensing stock options I ever heard was from Warren Buffett

      A response to Buffett is here [catallarchy.net].
      I agree that stock options are a form of compensation; it is very clear that they are. But is the next step where I disagree. It does not necessarily follow that the company suffers an operational expense. Rather, it is the shareholders who pay for the compensation through dilution of their existing shares. Stock options cannot both be an expense to the company and a dilution of shareholders' stock; that would be double-counting.
      I have to agree. Issuing options (or additional shares) imposes a cost to existing shareholders via dilution, but the total value of the company is unchanged. The company is just transferring equity from one group of investors to another.
      • However, they miss the fact that if they had given the _same options_ on the open market they could have been compensated for them. Instead they gave them to employees. Clearly if you have something of value (no matter what it is) and you give it away instead of selling it, you are incurring an expense are you not?
    • by mgoff (40215) on Sunday June 27, 2004 @04:08PM (#9545680)
      Yes, Buffet makes an excellent argument. However, consider some of the negatives. Companies will be expensing something that has no cash cost. Therefore, they will be deducting the opportunity cost of those options (fair market value if they had sold them to an outsider) from their income. Does this really make sense?

      Right now, companies already expense the cost of the capital appreciation of the share sold when the option is exercised. How? Stock buybacks. When a stock option is exercised, the employee is sold a share out of the option pool (which usually means there's no dilution). The company books this cash as a share sold, just as if it was sold on the open market (but at the lower option strike price instead of fair market value). Eventually, that share is bought back (most companies continuously buy back shares) and the cost of that buyback is expensed. What is up for discussion is if/how to expense the option value of the option, not the capital appreciation of the underlying share.

      Also, consider that many of these options will go unused, either because the employee leaves the company before they vest or because the options are underwater when they expire. The FASB recommendation permits companies to make allowances for these situations, but those allowances will always be wrong. The FASB permits similar allowances for bad debt and other estimations on the pro formas, but those entries are made up of many transactions, and they will statistically approach a historical value. Stock options are typically granted to many employees at once with the same strike price. This will appear as a single transaction-- instead of multiple, offsetting errors, companies will have single, large errors. This will drive more volatility than the other estimations on the pro formas.

      I agree with Buffet that options clearly have value-- otherwise employees would not value them as compensation. I also agree that some method should be employed to correct the pro formas for options. But, the two major mechanisms recommended were designed to estimate fair market value, not the impact of an opportunity cost to a company's financial situation. I think using them in this way is not accurate. In fact, I think it will make the pro formas less accurate.

      In the interim while we wait for the accounting wizards to come up with a better solution, I think it makes sense to just continue doing what most companies do today. If you look the 10-K for most companies, you will find extremely detailed option data. Using this data, you can compute the "expense" to the company in any way you find best. If the SEC requires companies to bake this in to the pro formas, it will be much more difficult to unwind the financials to use your own technique.

      Yes, it will be more effort than just looking at the Net Income line or doing a quick ratio (or a Quick Ratio). But, investing in individual securities is not for amateurs (and I include myself if this category). That's what mutual funds are for.
  • That depends. (Score:2, Interesting)

    by gr3y (549124)

    Will my stock be worth less when those options are exercised, en masse, by employees fleeing a sinking ship? If the answer is yes, then companies should expense stock options.

    In fact, it's amusing that this even requires discussion. Options are like any other debt, except that the eventual cost of paying off that debt is unknown. Companies are required to report outstanding debt. Why should options be any different?

    • Actually options are a way of equity financing, not debt financing. The only debt incurred by offering options is what you paid to purchase them off the open market and move them to the reserves. Options are only an opportunity cost, and that's if your stock price rises.
  • No way! (Score:2, Insightful)

    by JohnQPublic (158027)
    Stock options don't have a clear value. Since you can't say "12,000,000 options are outstanding and excercisable, at a cost to the company of US$120M", you can't apply it as an expense. If you think Enron and Worldcom cooked their books, just wait until you see how the "expense" of stock options winds up being calculated. It's just as bad as requiring businesses to value their "goodwill" and take an earnings hit when it "goes down".
    • So.. With that logic, I would presume everyone should use the write-off method because we never have a clear idea how much bad debt we should deal with? Do you follow GAAP? The point of book keeping is not to have perfect books (we all recognize there are some hard decisions about how to a good job of keeping books in order), but to have a reasonably faithful representation of what is actually occurring in the business. By treating stocks as something other than compensation when it is used for compensat
    • The most common way of pricing an option is using the Black-Scholes Model [wikipedia.org]. I don't really know much about the mathematical specifics of the model, but I'd expect that the "price" of an option as calculated by the Black-Scholes formula when the option was issued would translate into the "expense" that the company incurred. This is because it would be essentially equal to the amount that the people who were issued the options could sell them for- and compensation == expenses, to paraphrase the Warren Buff
    • goodwill (Score:3, Interesting)

      by Thng (457255)
      . It's just as bad as requiring businesses to value their "goodwill" and take an earnings hit when it "goes down".

      Goodwill, to first define, is the premium paid for another company above what they are physically worth (buildings, equipment, patents, etc.) Therefore, if Co. A buys Co. B for $20 mil, and there are only $15 mil of physicaly goods, $5 mil is goodwill.

      So the question now, is why expense (impairment is the technical term) it if the value of goodwill goes down? Because it is a consistent treatme

    • Re:No way! (Score:5, Informative)

      by swillden (191260) * <shawn-ds@willden.org> on Sunday June 27, 2004 @03:58PM (#9545605) Homepage Journal

      If you think Enron and Worldcom cooked their books, just wait until you see how the "expense" of stock options winds up being calculated.

      They'll play with it, of course, but how can expensing the options at any positive value be worse than the status quo? Most companies currently take no hit whatsoever for issuing options; it seems much better to argue about whether the cost ought to be larger or smaller than to ignore the cost entirely.

      It's just as bad as requiring businesses to value their "goodwill" and take an earnings hit when it "goes down".

      "Goodwill" does not mean what you think it means. It's not the case that businesses estimate the dollar value of their reputations, as the word might seem to imply. It's a trick used to account for what happens when a company purchases another company. Suppose you want to buy my business, which consists of a factory and other physical assets, a large, loyal customer base, an excellent, widely-recognized brand and a bunch of great employees. Clearly, the employees, the brand and the customer base are all valuable to you, and are the real reason you want to buy my company. But the employees, great as they are, are an expense from an accounting point of view, and the customer base and the brand are irrelevant.

      So, suppose you agree to pay me $100M for my company, and the factory and tangible assets are only worth $20M. That means your balance sheet will show a $100M debit and a $20M credit. On paper, your company just lost $80M by buying mine, even though everyone agrees that my company's future earning potential is well worth $80M, because of the above-mentioned factors. It would be inaccurate to show that the value of your company declined by $80M as a result of the purchase. Maybe the value went up, maybe it went down, but as far as anyone knows now, it was a fair price, meaning you got what you paid for, so you broke even, from an accounting point of view.

      The solution is "goodwill". Your accountants will record a $100M debit to cash, a $20M credit to tangible assets and an $80M credit to "goodwill". If, a few years later, you determine that that division of your company is now worth only $60M (fair market value), because the market for its products declined, or you just didn't manage it well, then you will reduce the "goodwill" on the balance sheet accordingly and take that hit as an expense. Assuming the factory is still worth $20M, my "goodwill" is now worth $40M, so you'll apply a $40M expense, reflecting the actual decrease in value of your company.

      I'm sure I've got this at least partially wrong, hopefully a real accountant will chime in, but that's the gist and it is a sensible approach to solving a real problem.

    • Re:No way! (Score:3, Informative)

      by richg74 (650636)
      Stock options don't have a clear value. Since you can't say "12,000,000 options are outstanding and excercisable, at a cost to the company of US$120M", you can't apply it as an expense.

      I'm sorry, but that is just wrong. The idea that stock options don't have a clear value will come as news to all the investment banks in the world that trade options, and have to mark their P&L accounts to market every day. Beginning with Fischer Black and Myron Scholes in 1973, there has been continuing work in devel

  • by retostamm (91978) on Sunday June 27, 2004 @03:16PM (#9545317) Homepage
    I think one of the major problems in this discussion is that the Stock Options for the CEO types (equivalent of about 1000 employees options, if you count them) can cause wrong and fraudulent reporting in order to sell off the stock.

    Individual Employee's options are a great way to retain employees, keeping them motivated and having them think big picture, but they just can't fake the bottom line.

    And guess who's options would definitely go away?
    • Options are options, for the CEO or Account Manager they are all the same.

      The problem is tech companies have been dishing out options instead of wages.

      Those are only worthwhile if the share price rises,

      The shareprice rises if the profits rise.

      The profits rise if the costs go down.

      Wages are costs, so the simple act of issuing options+lowered wages causes the labour costs to reduce, the profits to increase and creates a fake "growth" in profitability.

      You can increase the profitability growth next time b
    • > I think one of the major problems in this discussion is that the Stock Options for the CEO types (equivalent of about 1000 employees options, if you count them) can cause wrong and fraudulent reporting in order to sell off the stock.
      >
      > Individual Employee's options are a great way to retain employees, keeping them motivated and having them think big picture, but they just can't fake the bottom line.
      >
      > And guess who's options would definitely go away?

      *ding ding ding ding ding*

      Someone

  • Not IF but HOW (Score:5, Informative)

    by schwaang (667808) on Sunday June 27, 2004 @03:18PM (#9545334)
    Realistically, options are an expense and pretending otherwise on the balance sheet is just gamesmanship.

    Excerpting from this recent article [sfgate.com] about the issue:

    The most potent criticism of the board's draft proposal to expense options when they are granted, came from an unlikely source: Mark Rubinstein, a finance professor at UC Berkeley's Haas School of Business, who helped develop the method.

    "I was one of the inventors of the (board-proposed) model, and I say: Don't use it. It doesn't work," Rubinstein said. Companies should have to expense only the amount that an employee profits after he exercises the option to buy the stock, Rubinstein said.

    That came as a surprise to the FASB board members.


    [The FASB board is the federal advisory board that's hashing out what should be done about expensing stock options.]
    • Stock options have value and should be expensed somehow, but to "only" expense the gains when the employee exercises and benefits leads to all sorts of counter-productive results.

      As CEO, I work hard to increase share price to benefit the shareholders. I somehow achieve my goal, then all my employees (including me) exercise/sell to reap the benefits. Suddenly my earnings take a huge hit. Boom, my stock price crashes. Sure, I could call it a one-time charge, but option exercise/sell is basically out of m
  • Wrong (Score:3, Insightful)

    by Tod DeBie (522956) on Sunday June 27, 2004 @03:27PM (#9545388)
    Expensing stock options as proposed is not a good idea. Despite what many suggest here, it will not produce a clearer picture.

    If you expense stock options when granted, you have to make an estimate as to their value/cost and use that in the financial statement. The problem is that, when granted, stock options do not cost anything to the company and have no dollar value, and they may never. It is likely that in most cases, the estimated value when they are expensed will be revised when the options are exercised.

    Right now, companies do one of two things when options are exercised: they either grant new shares, diluting the existing stock; or they buy back shares (or use shares already held back) equal to the amount exercised so as to not dilute the stock. Both methods have their merits, but the point is that it is only at the time of sale when the true cost of the option is known. So why change the way things are working? I suppose we could force all companies to buy back instead of dilute the share pool, but, I really don't see any case for expensing them when granted.

    Options should only be expensed when they are exercised, which is exactly what happens today. Why do we need to change?

    • The difficulty of expensing options should not be a barrier to accounting for them.

      You can currently buy stock options in the market, why not use a similar system?

    • "If you expense stock options when granted, you have to make an estimate as to their value/cost and use that in the financial statement. "

      Look at it from the shareholders viewpoint, would you want an estimate BEFORE you invest, or AFTER the options have been cashed in, your shares are diluted and you are screwed?

      At the very least the accounts should have:

      Profit before Options Expensing $2B
      Cost of Options Expensing $3B
      Profit after expensing options ($1B)

      That way *you* are free to believe the company i
  • by HockeyPuck (141947) on Sunday June 27, 2004 @03:33PM (#9545444)
    I've worked at dotcoms and now a large company which gives out stock options to its employees. Until i joined the large company I didn't realize the value of options (not a get rich scheme).

    If companies have to expense options, they'll drop the option programs as the expensing will kill profitability. Therefore companies will nolonger give out options (MSFT has already stopped giving out options), and thus the major $$$ form of compensation will be salary, and salary does not keep an employee at a company for a long time, as you can jump ship to another company easier to get a raise than to ask mgmt.

    Plus many companies spend big $$$ repurchasing stock on the market to keep up the stock price.

    Lastly, if options are expensed then only the execs will get options and not the workers in the trenches.

    HockeyPuck ---> .
    • Agreed. One of the best ways for a small company to offer performance based incentives is through options, and if you force businesses to start making wild guesses about the expense of the options you will see less and less managers and team leaders getting options, and back to the old "who cares how well you perform, here's a flat salary" method.
  • Who get stock options? That's the better question. I know accountants and CEOs are nerds too. But, how many CEOs or memebers of the FASB read Slashdot?

  • I know for certain that due to these moves, my employer is already looking to replace stock options with something else. For me that's almost okay because its somewhat useless for me to get the option to purchase something in the future while my employer gets an immediate write off. It would be nice to get actual stock, cash, or some other perk - but an option requires that I both wait AND spend money - not always a meaningful benefit by any stretch.
  • Never accept stock options in the place of pay. Sometimes they work out, but they're also pretty cheap to hand out for the companies that do it.

    Anyway stock options (on publicly traded companies) are cheap enough in almost all cases that you can fund them yourselves if you've got confidence in the company, right?
  • If a company buys a tool or a building, they don't expense it because it has on-going value -- assets are held and used for the ongoing value they create. If a company buys paper or electricity, they do expense it because such goods are used almost immediately - expensible items are consumed or flow through the company. By that logic, options are an asset -- they have ongoing value and they are not consumed.

    Warren Buffet is wrong, options are not like standard compensation -- options don't walk out the
  • Corporate expenses are incurred when a corporation buys something. A stock option, even when exercised, does not cost the corporation anything. It's a con game, to make less costly, high-growth infotech companies, which offer more options than industrial corporations, seem to cost more. Next they'll allow tax writeoffs for "opportunity costs", like letting Lockheed cancel its puny tax liability because it invested in laser missile defense instead of gas pipelines.

    What else do you expect from the president
    • Corporate expenses are incurred when a corporation buys something. A stock option, even when exercised, does not cost the corporation anything. It's a con game, to make less costly, high-growth infotech companies, which offer more options than industrial corporations, seem to cost more. Next they'll allow tax writeoffs for "opportunity costs", like letting Lockheed cancel its puny tax liability because it invested in laser missile defense instead of gas pipelines.

      Absolutely. They'll be eating babies next. W

      • Options don't cost the corporation against which they are reserved. They eventually cost the exerciser, although there's a purely theoretical "opportunity cost" when options cost the exerciser less than the market price at exercise time.

        Enron didn't die until they filled a phonebook with fake companies to hide their debt, and ran out of Anderson accountants to paper over the evidence. They would have died much sooner if they hadn't bribed so many politicians, most notably Bush/Cheney.

        The "bottom line" is
    • "A stock option, even when exercised, does not cost the corporation anything. "

      The accounts are for the shareholders. It costs the shareholder. The shareholder holds a share, its not the profit, its the profit per SHARE they care about.

      So increasing the shares decreases the shareholders share of the profits, even if the company makes the same profit.

      • Increasing the number of shares is dilution, which has been understood, and taken into account, by generations of stock buyers. Why should a shareholder's private expense be counted a corporation's expense? How does that give stock buyers any better info? In fact, it gives them worse, more muddled info, and a less manageable financial picture.
  • After reading some comments most here seem not to understand the issue.

    Stock options does not mean you are compensated with stock. That is a common practive but options mean you will be able to buy the stock for a certain price at a given time, not that you HAVE the stock now. So they have not given you anything other then an agreement to seel at a certain price if YOU DECIDE to buy at the time of the option. I had to take a number of accounting courses as part of my CS program let me assure you if a co
  • I believe that the drive to force the expensing of options is rooted in a valid concern: currently, the impact of options on shareholders isn't properly disclosed.

    That said, expensing doesn't address the real issue correctly.

    What happens when an option is issued, from a financial point of view, is absolutely nothing. No expense is incured, no income is acrued, no increase in the share count occurs. It is a big zero from a financial point of view.

    But yet FASB, wants to force a calculation of expense to be
    • "What happens when an option is issued, from a financial point of view, is absolutely nothing. No expense is incured, no income is acrued, no increase in the share count occurs. It is a big zero from a financial point of view."

      If you believe that then you are free to add the number back onto the profits to get what you believe is a real number.

      However others may disagree, I for one.
      I invest in a company for it to grow, so of course the options will reach strike price and will cost money, otherwise I would
      • By forcing them disclose the impact of both dilution through reporting a diluted number as the "real earnings" and by detailing the full set of option grants, strike price, and term, you can get all the information required to work this one.
        • "By forcing them disclose the impact of both dilution through reporting a diluted number as the 'real earnings' and by detailing the full set of option grants, strike price, and term, you can get all the information required to work this one."

          But isn't that just hiding the devil in the detail? There may be thousands of differing options types within a company, so calculating the number from the mass of the detail is simply beyond the bulk of the shareholders.
          In effect you put up a forest to hide a single t
  • In my opinion, anything that leads to long-term stability of national and world economies is positive. It seems to me that there is a trend in the U.S. with large, quicky growing companies being irresponsible in the way they handle their finances. Because the stock market is speculative and therefore volatile during the fallout of these companies, a single company that folds can have a huge impact. I would like to belive that the market will eventually discourage this, but perhaps the allure of making quick
  • At the time when options are awarded, their value and expense to the company should be expensed based on Black-Scholes or some other acceptable formula. The reason why they shold be expensed at that time is that they effectively represent an expected long-term liability to the company.

    However, when the options are actually exercised, the company should also expense any difference between the initial valuation and the actual profit made when exercised. If they are exercised with a smaller profit to the em
  • stock options should be free as in speech, and free as in beer, too. everyone knows those PHBs are BOFHs. if these companies knew what was good for them, they'd keep track of these options on a secure, reliable, open-source platform like mysql + apache. I for one am not about to let our new corporate masters bludgeon our rights with stock option rights management legislation.

    I heard over on groklaw that MSFT was unfairly leveraging their mid-level business software unit for stock option dispersal in the M
  • no one really sees it in the financials, but it detracts from the bottom line none the less.

    Options are being abused in my opinion, and requiring them to be expensed is simply a formal way of reporting to investors how the company is spending the profits. If I own stock in a company, I want to know how many options the executives are getting. Its very telling to me.
  • Fuck yes!

    ENRON, Adelphia, Worldcom - pick the scandal and they have screwed lower-level employees with worthless options and tossed loads of cash at the top boys with the same tool: stock options.

    If there were rules requiring the company to "expense" an option we would have some, small, check on the value of these things. As it is today, the value (or the right to exercise the option) varies greatly.

    If the company had to expense options (and, thereby disclose the classes of options they provided) and th
  • by Krellan (107440) <(krellan) (at) (krellan.com)> on Sunday June 27, 2004 @04:48PM (#9545899) Homepage Journal
    I have benefited from stock options in the past: not enough to be wealthy, but enough to give me a pool of savings to last the year-plus I have been out of work so far.

    However, I favor stock option expensing, even though it would most likely reduce the number of options that are awarded to employees (since the company would have to bear an increased accounting cost for each option that is awarded). The reason is that it is more honest. The profit from exercising stock options comes out of the pockets of the stockholders who were suckered into paying full price for the stock! As a stockholder, I am annoyed that optionholders can "stealth" themselves from company expense reports, as is currently done.

    Microsoft has a truly good idea, that I read about a while ago: issuing real shares of stock, not just options. This neatly avoids the entire debate regarding the accounting of stock options. Employees would be paid in real shares of stock, in addition to cash. This has all the benefits of encouraging employees to take a stake in company performance, as options do, and motivates employees to want to make the stock price rise.

    Issuing real shares of stock would easily be accountable, and would also have added the benefit of being fair to all employees, not just the few who got in early and got the coveted "below-a-dollar" options....
  • Private start ups (Score:3, Informative)

    by BroncoInCalifornia (605476) on Sunday June 27, 2004 @06:33PM (#9546517)
    From the New York Times article:
    "Stock options are the most powerful incentive we have to attract employees," Andy Bechtolsheim, a founder of several Silicon Valley companies, including Sun Microsystems, told the demonstrators. "Why else would someone leave a large company and take the risk" of joining a start-up firm?

    Without options, three out of four start-ups that succeeded in Silicon Valley would have failed, because they would not have been able to attract high-quality employees, Mr. Bechtolsheim said.

    This does not make sense!

    A start up is not public. They do not have to put out a report to the public every quarter. Expensing options do not have much of an impact on start ups.

    And companies can still give stock options if they expense them. They just will not look quite as profitable on those quarterly statements.

  • by Tri0de (182282) <dpreynld@pacbell.net> on Sunday June 27, 2004 @06:40PM (#9546561) Journal
    Some people, myself included, will simply not invest in any company that does not expense options.
    Other people will gladly take risks in companies that do whatever the hell they want in granting and expensing options.
    Maybe one party will make money, maybe both, maybe neither; you pays your money and you take you place at the table WRT betting on risks/rewards.
    Of course I realize that I have little chance of catching the next totally hot startup, but I've studied a hell of a lot of accounting and IMO a company is only as good as the accounting method they use; anybody throwing money around in the market who doesn't know GAAP and SAP and the difference betweent them is a fool- they still might be a lucky fool, but still a fool.
  • by dh003i (203189) <dh003i@@@gmail...com> on Sunday June 27, 2004 @07:03PM (#9546681) Homepage Journal
    Stock-options are a share-dilution. They are not an expense. You cannot count stock-options as both an expense and a dilution of shares; that's double-accounting for them.

    See The Great Accounting System [mises.org]

    The Stock Market, Profits, and Credit Expansion [mises.org]

    Accounting for the Austrian School [mises.org]

    Should Stock Options Be Expensed [mises.org]

    • Nothing you posted has anything to do with the most important issue: STOCK OPTIONS ALLOW PEOPLE TO BUY STOCKS AT GREATLY DISCOUNTED PRICES.

      Where does that money go, hmm? If a stock is $50 per share today, and you exercise your option to buy that stock for $2, what happened to that $48?

      • Stocks are "worth" what anybody is willing to pay for them -- a stock quote is just the going market rate at that point in time. Companies that give shares of stock as options are simply agreeing to sell the shares at a pre-determined price, either absolute or as a percentage of the market rate (depending on how it works at the company in question or in the contract).

        Imagine I have 3 million widgets which other people are willing to pay me $50. But I like you, so I say, "benzapp, you're doing a good job. I

  • by Keeper (56691) on Sunday June 27, 2004 @08:31PM (#9547170)
    It doesn't give any useful information to investors.

    Options should be expensed when they are exercised. Not before.

    The figure listed isn't necessarily a bad thing, and would be useful to project the outstanding value of outstanding options the copmany currently has, but it shouldn't be treated as an expense because the figure is misleading and hides the true operating costs of the company.
  • The question is... (Score:4, Interesting)

    by rice_burners_suck (243660) on Sunday June 27, 2004 @09:52PM (#9547610)
    My opinion on this issue is quite simple: If it will screw Microsoft over, do it. If it won't screw Microsoft over, or if it will be to their advantage, don't do it. Simple indeed.

    So the question is, what's the most disadvantageous for Microsoft?

  • 60% drop in earnings (Score:5, Interesting)

    by khallow (566160) on Sunday June 27, 2004 @10:41PM (#9547924)
    I've argued in favor of expensing stock options in a number of places in this message, but this represents what I think is the true problem with the current accounting approach.

    According to Bear Stearns, there would be a 60% drop [sfgate.com] in profits if the new rule were imposed. Think about it. Earnings in high tech companies are so dependent on stock options that these companies will "experience" a huge drop in profitability. Conversely, how can you support an accounting trick that buffs the profit of the industry by 150% (the reciprocal of a 60% drop)?

    Bottom line. Profits are grossly overstated industry-wide. Why shouldn't we have accounting that reflects that reality? Why should we let this fiction continue? Are we going to forget the lessons of the dotcom bubble? Accounting tricks do work. And investors and employees can and are scammed by them. Finally, why do we need to fight so hard to get valid information about a company? It's just wasting our time which collectively is more valuable than that of a few company accountants.

    See here [slashdot.org] for more discussion of this particular story. That's where I got the link BTW.

  • this might work... (Score:3, Insightful)

    by alizard (107678) <alizard@eEEEcis.com minus threevowels> on Monday June 28, 2004 @01:01AM (#9548565) Homepage
    They probably shouldn't be expensed until after the company either goes public or hits a market cap threshold. At that point, there is generally some remote clue as to the actual value of the stock, as opposed to what the initial investors, founders, and new employees are praying that it's going to be.

    For a mature company, say MS to issue big gobs of stock to employees without expensing them and keeping the no longer unknown value off the books is a trifle ridiculous. At this point, this is just another form of compensation and as such should show up on the books as an expense. A.Lizard

  • by Bob Cat - NYMPHS (313647) on Monday June 28, 2004 @03:40AM (#9549114) Homepage
    Assume company X has $100 million in actual cash profit one year, but grants options to employees that the SEC makes them record as $100 million of expense. Does that mean they did not make a profit, and thus do not have to pay any taxes on the cash?

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