... this is good stuff ... but not good for profit comparisons in the short term ...
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In Key Change, Coke to Treat Stock Options as Compensation
July 14, 2002 ... Associated Press
ATLANTA -- Coca-Cola Co. will begin treating future stock option grants as employee compensation, a key accounting change that advocates contend offers a fairer assessment of a company's performance.
The gesture by such a prominent member of the business community could set the stage for other major companies to follow suit as investors and government officials clamor for greater transparency in U.S. accounting practices.
Coke announced Sunday that, beginning in the fourth quarter, stock options will be expensed over the period in which they mature, or vest, based on the value on the day they are granted.
Stock options allow their owner to buy company shares at the price at which they were granted. They are designed to be an incentive for management performance.
But after the Enron debacle and several other corporate scandals, many observers -- including Coke's largest individual shareholder, billionaire Warren Buffett -- argued that options have induced executives to doctor financial reports as a way to fuel their share prices.
Enron executives earned tens of millions of dollars by cashing in their options before the energy trader's stock plunged.
Accounting for stock options has gained attention in Congress, where the Senate on Thursday defeated a proposal to make companies treat options as expenses.
But the voluntary move by Coke might lend additional momentum for the different accounting of stock options, which company officials readily conceded Sunday.
"Our management's determination to change to the preferred method of accounting for employee stock options ensures that our earnings will more clearly reflect economic reality when all compensation costs are recorded in the financial statements," Coke chairman and chief executive Douglas Daft said Sunday in a statement.
Mr. Daft initiated the change after notifying Coke's board members, chief financial officer Gary Fayard said.
"It was really Doug taking President Bush's call (last week) to heart for corporate America and corporate leaders to step up to the plate," he said.
Coke's 2002 options plan authorizes up to 120 million shares that can be granted, or 4.8% of the company's outstanding shares.
Last year, Coke's top five officers received 3.72 million stock options, including one million shares for Mr. Daft. About 8,200 of Coke's 38,000 employees received options in 2001.
The change makes Coca-Cola one of the largest companies to count stock options as a compensatory expense.
To date, Florida-based grocery chain Winn-Dixie Stores Inc. and aerospace giant Boeing Co. are the only other major companies to make the change so far, Coke officials said.
Mr. Fayard said the options change also will help Coke better tailor its compensation packages, since there will be no incentive to offer one type of stock option over another. But he acknowledged Coke could have made such a change before corporate governance issues began to dominate news headlines.
"It is truly a new environment and I think this is one of the roles hopefully we can play in helping to restore confidence in financial reporting," Mr. Fayard said.
If such options were treated as an expense, they could weigh on earnings -- affecting profitability and stock performance.
The beverage giant expects a financial impact of a penny per share this year against earnings, increasing to 3 cents in 2003 and ultimately to 9 cents per share, Mr. Fayard said.
There is no cash-flow effect from the change, so executives do not believe the change will harm Coke's stock price, he said.
Copyright © 2002 Associated Press |
