I agree with you that it matters, but the option exercise flows and tax benefits *are* backed out of the EPS numbers. You are correct that the fact that it pays their salaries, so the company doesn't have to, is ignored.
The way I explained the mess to my fellow employees was this:
Option payoffs are no different than a secondary offering, except for the treatment on income statements. If I'm CSCO, and I hold a secondary offering, issue a million shares, and use the proceeds to pay $50M in salaries/bonuses to employees, it shows up as a compensation expense. It decreases earnings in addition to diluting existing shareholders.
Now consider if the employees have one million options. They exercise whenever they want, withdrawing $50M from the company again. No compensation expense is incurred. The dilution is the same, but it has no impact on income.
Why should these two scenarios be treated differently? They are identical from an owner/shareholder perspective. Granted, there is incentive involved in the option approach, but that exists in the first scenario as well.
It's clear to me that, at the very least, they should be charged against earnings as a high-risk loan to purchase the company stock, plus some sort of charge for the implicit put.
IMO the vendor financing is a more serious issue. Options have been an accounting hot button for a long time now. Vendor financing amounts to keiritsu. Their "sales" aren't sales at all - it's an equity-for-equipment swap.
The *buyers* should be recording income for that arrangement. They're swapping their worthless paper for hardware! Talk about a money tree - LOL!!!
BC |
