GST, in all seriousness, while I don't agree with the idea of booking an expense at grant for options that have not yet been earned, I do agree that, as they are earned, their value in terms of compensation should be recognized as an expense. The key, IMO, is that the treatment be a fair representation of the cost.
In reality, a solution that comes close, though not all the way IMO, is already out there and companies already had the option of using it. If you have access to a fairly complete set of accounting rules and pronouncements, look up FAS-123.
Under FAS-123, aka Fair Value Method, options are valued at grant, but the expense is taken ratably over the period of vesting - i.e. the periods where the service being compensated is received by the company.
The accounting is fairly simple, except that deferred tax assets and expenses come into play and make actual implementation a bit more complex. When the option is granted, you estimate its value based on an appropriate model and also estimate future forfeitures of the options (based on past experience with turnover and other factors). The estimated value of an option is multiplied by the number of options expected to actually vest to get the total expense to be booked over the vesting period. Each period that options vest, you book that portion of the total as an expense, crediting paid-in-captial (stock options) to balance (the expense would actually be reduced by a reduction in deferred tax expenses).
Over the term of vesting, the company would adjust for changes in their forfeiture experience vs. the original estimate by increasing or decreasing the expense booked in subsequent periods.
So, you are not requiring companies to take an expense for compensation that hasn't been earned - a big difference compared to what you've been crusading for.
Where it falls short, IMO, is in two areas.
First Black-Scholes, as I've said, assumes transferability of the option itself, so the valuation model would need to be adjusted to reflect the restriction on transferability. Also, you'd need to factor in possible changes in the term of the options such as the typical shortening of the life when an employee quits while holding vested options (ISOs by law must expire within 90 days of termination).
Second, while FAS-123 addresses forfeitures (failure to vest), it does not address the issue of expiration without exercise (expiring out-of-the-money). If I write a call, selling it in the market, and it eventually expires without being exercised, then I have income. If a company receives non-cash consideration (work by the employee) as payment for an option it writes, that consideration should become income (or a reduction of expense) if the option eventually expires unexercised.
There is a whole body of research and valuation practice to address the first issue and the second one seems simple enough, so we can overcome these problems if people will cool the rhetoric and work it out fairly.
JMO,
Bob |
