A discussion of some of the arguments used in favor of accounting for stock options by adding an new, explicit compensation expense line to the income statement. -
1. Stock options must be recorded as an expense because the company loses the opportunity to sell the stock on the market.
This is an attempt to employ the concept of opportunity cost to claim that the company suffers the loss of the market value of the granted stock when it cannot realize the proceeds of a sale itself.
The concept of opportunity cost itself is perfectly fine. The opportunity cost of action 'a' is its preclusion of action 'b', the second most preferred possibility. Thus, the opportunity cost of a Florida vacation may be a vacation in Paris, with the choice of the former precluding the latter.
However, the opportunity cost of a stock grant is the inability to sell a certain stock certificate, not sell any particular amount of stock. If selling stock on the market was a good idea in the absence of an employee stock grant, it will still likely be a good idea in its presence. The creation and sale of new stock certificates has essentially zero opportunity cost to the company, as opposed to their cost to the shareholders. Although there will be some real effect on the market value of company shares due to increased supply, it will not approach the total market value of the granted shares, as the proponents of this argument would claim.
2. Some proponents of option expense accounting simply claim that because the employee undoubtedly receives a benefit, often a large one, that exact benefit must come out of the hide of the company.
This is part and parcel of the intrinsic value fallacy, as opposed to the Subjective Theory of Value discussed in an earlier post. In any voluntary exchange, which this is, there is not an agreement on the equality of values of the exchanged goods, but rather a strong mutual disagreement as to the values of the exchanged goods. If I choose to exchange good 'a' to you for good 'b', the implication is that I value good 'b' more highly than any other possible use or exchange of good 'a'. Presumably, your subjective value scale shows the exact opposite condition, if you choose to make the exchange.
Note that this argument is wrong twice. First, it is wrong that value received is equal to value granted in general. Secondly, it tries to apply the cost to the company, and not to the shareholders where it actually belongs. All company costs are incident on the shareholders, but only some of them belong in the dollar cost side of the accounting ledger, as opposed to the ownership structure side.
Regards, Don |
