You are arguing an interesting academic point.
Which is predicated on the single assertion that the cost to stock options is whatever some black scholes calculator spits out.
Which isn't what they end up costing shareholders, and isn't what they end up returning to employees, and isn't what is reported to the IRS.
Now, if there is a value that is indeed exactly what they end up costing shareholders, and is exactly what they return to employees and is exactly what is reported to the IRS, which one do you think better represents what options are worth?
Shareholders lose by ending up with a lower claim on the assets of the corporation. They do not lose "opportunity cost". Period. It turns out that shareholders lose the exact amount n * (P-S) where n is the number of options exercised, P is the market price at exercise, and S is the strike price of the options. This is equal to the cost of dilution summed over all future expected income streams.
Employees gain what they put in their pockets. Which turns out to be exactly n * (P-S) where n is the number of options exercised, P is the market price at exercise, and S is the strike price of the options.
And the company is bound to report these costs to the IRS, or else. And nobody wants an "or else" from the IRS. Which, coincidentally is given by same formula n * (P-S).
Misguided journalists and shallow thinking academics occasionally claim that options are worth something different than this.
There are a few who get it that the Black-Scholes computation mandated by FASB is an attempt to ESTIMATE what this cost will be. But a whole bunch of others get hung up assuming this is what it is. But that's naive.
The average family in the US has 2.5 kids. How many half children have you met?
As far as option cost of 2.6 versus 2.8 B$ in 2001? Irrelevant. How about looking into the company's books? Not the hypothetical black-scholes stuff that they publish to trick shareholders, but the stuff they get in deep doodoo with if they get wrong. What they reported to the IRS.
Now, you can't really see their income tax form. But you can see some of the results. For example, you know that they have a tax rate of 35%. So if they claim a deduction of 1.397 M$ for Employee Stock Option Benefit you can bet your bottom dollar they reported stock option cost to the IRS in the amount of 3.991 B$. Not 2.6 or 2.8 or any other silly number.
In the year 2002 so far they have only accrued 51 M$ so far. Of course, they can't claim more in tax credits than they earned, so we don't know the full value of options is. But we'll all be in a better position to guess if the McCain/Levine bill passes.
You have adopted an interesting theoretical stance that what options are worth is what they might be worth if sold on the market on the day of grant.
However, that's not what they end up costing shareholders, and it's not what they end up giving in benefit to employees. And in the end it's not what they claim to the IRS.
Mindmeld and I went over this with a fine tooth comb some months before most of the talking heads even started blabbering about stock options.
The sole thing about options is that companies are reporting different costs to shareholders than they are to the IRS. And if they were reporting the costs to shareholders that they are to the IRS, then the companies wouldn't be reporting so much in earnings at all.
And we might not value them so highly.
When the company is reporting two sets of books which show different profits, all we know for sure is that profits are being misrepresented to someone.
Either they are misrepresenting profits to the IRS, or to shareholders.
Care to guess which side of the line I place my bet?
John |
