Pete - Good to focus on the denominator or eps, or number of shares issued, which is already in the denominator and reported as diluted number of shares, vs the "cost" of options which be an attempt to charge for the cost of these options in addition to the dilution in the numerator of eps. So far, most of the effects of options is tracked through diluted eps.
On the latter point,
There is no direct cost to the company, if you want to compute the indirect or opportunity cost, it is the difference between the strike price and market price at the time the shares are granted, pledged as compensation. Any subsequent price appreciation in those shares is not a cost to the company, anymore than appreciation in shares they sold at IPO.
One point this raises, is that even this cost is only fairly clear for "in the money" options, and could only be charged once the employee can exercise the option. One problem is that firms want employees to hold these options and often put limitations on the options, i.e. employees must hold for x number of years. As recent experience points out, there might have been a charge for options which, if stock price falls, employees would never exercise. In much the same way as SEC gets bent out of shape about claiming revenues for non-cash benefits etc, they should also not accept costs charged which subsequently are not costs and would then raise income! They don't like things which give management the ability to fudge net income, why should they think this is a good idea. |
