Hi Pete, strange things relieve you.
I never said that the COMPANY incurs a cost. I said that SHAREHOLDERS incur the cost. You seem fixated, like others, on the fact that since the Company doesn't incur the cost that it doesn't exist.
A fool and his money is soon parted.
This is funny: "There is NO DEBT, the company GRANTS the employee the right to ... blah blah blah.
Semantics are such simple things. There is no debt by the company in the strict sense of the company owes no money to the employee, pays no interest and records no liability on the asset sheet. Sure.
But promising someone to pay them money in the future is a debt. And stock options are many things, amongst which the promise of future money of indeterminate amount ranks fairly highly. Employee gets paid an unknown amount, and someone else pays and the company arranges it so that it doesn't appear on the books. Who pays whom is a technicality. Something like the wave particle duality problem in physics. Most minds on the planet are bent out of shape trying to contemplate this phenomenon. A few are capable of grasping it for what it is and navigating the consequences effectively.
The fact that the board of directors agrees the size of the pool in advance is hardly meaningful. As if because you get a pre-approved mortgage from the bank, then when you sign the paperwork for the real amount it isn't a debt? LOL. Try again.
And the instrument itself is a "grant", which legitimizes the perspective that there is no debt of wage involved. Much the same way as shutting one's eyes legitimizes the perspective that there's nothing to be afraid of. It's all in how we choose to look at things.
But there is some truth to what you claim.
There is no direct cost to the company. Absolutely correct. You may actually be relieved that me and my voodoo accounting agrees with you.
Using option valuation that has increased over a multi year period and calling it a cost to the company in the year and amount of exercise,is ridiculous. Yes, it's not a cost to the company.
But who cares? Whether or not it's a cost to the company is about as important in the grand scheme of things as half a bridge.
The purpose of shareholding is so that the company's value can accrue to the shareholders benefit. Stock options are a cost that is carried by shareholders.
Are you trying to tell me it doesn't make sense to count the cost against the benefit?
Just because the cost doesn't accrue to the company doesn't mean that it doesn't accrue to the shareholders.
I am explaining the cost to pocket A (shareholder) in terms of the actions of Pocket B (company) while cash from Pocket A goes to pay Pocket C (employee).
In this regard certainly pocket B has no debt, and incurs no cost. So your narrowed-to-a-point point of view is perfectly correct. And just conveniently leaves out the fact that Pocket A gets emptied while Pocket C gets filled. And naively assumes that since no money passes through Pocket B that Pocket B has nothing to do with it.
Which may indeed be technically correct.
However, speaking merely from the slightly broader point of view of a shareholder, I actually don't give a rats ass whether the company incurs costs on my behalf or whether I incur them myself because of what the company does. In the end it's the same thing. If you feel obliged to make such an important distinction, feel free.
There are millions out there who have a vague notion that stock options cost something, and have something to do with dilution of EPS. But have never bothered to figure out how it all relates to earnings and share price and so on. And are absolutely certain that it has nothing to do with the company. But also haven't figured out what it means to shareholders.
And many amongst them prefer to remain ignorant than think through something complex.
If you think my accounting is nutty, try the following exercise. Pretend for a moment that you are the sole shareholder of Qualcomm. Work yourself through this person's finances by following only one rule: when the company issues a share, this person buys it at "market price".
Now, our make believe shareholder doesn't actually get any wealthier when the market bids up the price of shares (he still owns the same asset, Qualcomm). He also doesn't get any poorer either when the stock price plummets. Mq will appreciate this idea. His wealth only changes when Qualcomm's assets actually increase or decrease.
Now, if Qualcomm issues a share and he buys it directly from the company, he isn't any richer or poorer. Money flowed out of his Cash pocket and becomes a Cash asset of the company. Which he owns all of. He loses some dollars of cash, gets the same dollars of asset. And thus is no richer or poorer.
If however Qualcomm issues a share to an insider for $1.00, and our Shareholder then buys it from the employee for the market price of $32.00 then the employee ends up with $31. Our Shareholder is poorer by $32 but richer by the $1 that the company gets. So our Shareholder is poorer by $31.
Maybe in parallel the company increased its assets by $35 (not including what our Shareholder has contributed in cash). Or maybe the increase was $27.
But it does no good for him to sit there counting himself wealthier by $27 or $35, when in actual fact in the sum of all transactions he is merely wealthier in the amount of $4, plus or minus.
He can argue that his leakage of wealth is offset by the wealth that the company is generating. And so he should. But to make such a claim he would be well served to merely ask "by how much". And determining whether it is plus or minus. Which is what I am doing.
Particularly if our Shareholder is contemplating purchase of Qualcomm for 25 Billion dollars. He might want to know how long it will be before the company accumulates the other twenty someodd billions. If along the way he is also expected to contribute another twenty someodd billions towards the company's generous employee enrichment program, then he might want to think twice about how much he thinks is a fair price!!!
Warren Buffett calls this "thinking like an owner". I suggest you do the same before labelling such "accounting" as Voodoo.
It may be completely foreign to you. But just because you don't understand something doesn't make it incorrect.
John |
