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Strategies & Market Trends : Employee Stock Options - NQSOs & ISOs
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To: rkral who started this subject7/29/2002 4:19:56 PM
From: rkralRead Replies (1) of 786
 
Ultimately in the end if they are not exercised (underwater or time) they have no fiscal effect on the company in the long run.

Not true, Eric. For those particular options .. the AVERAGE EXPECTED employee option compensation did not occur. The compensation is zero instead. The company obtained SOME employee services for free.

At other times .. with other option grants .. employees are over-compensated. That is, the intrinsic option value upon exercise exceeds the AVERAGE EXPECTED employee compensation .. the EXPECTATION and costs having been set on the grant date.

If the company can forecast the price volatility, risk-free interest rates, and option life accurately enough, the total costs expensed per FASB FAS 123 will roughly match the total compensation received by all employees .. for all options .. over a period of years. A tough task to be sure, but it's better than assuming the costs are zero.

Now pretend the company is a covered call writer, and this covered call writer begins refunding call option premiums to the call buyers whose options expired worthless. The writer would then have to find some way to collect a higher premium from the call buyers who exercised their ITM options. If the writer didn't do so, he/she would be losing money .. like a casino with the odds stacked against itself. But that's not the way the option market works .. and imo, that's not the way FAS 123 employee stock option accounting works either. (I'll read that portion of FAS 123 again.)

Similarly, if a company negated option expenses for those options which expired, the company would have to increase the expenses for exercised options. Then the outcome over a large number of options .. over a long time .. would again roughly match the total employee option compensation.

Does it sound like options are a crap-shoot for both the company and the employee? You can bet it is.

Ron

P.S. In response to post at siliconinvestor.com
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