OK. Show me a simplified analysis why option (or stock grant) should be expensed. I provided my little scenario:
1.company with 1,000,000 shares grant 10,000 stock to employees. Changes nothing except diluting every share by 1%. Stock grant transfer 1% wealth from shareholders to employees.
2. Oh heck, now the company grant 10,000,000 shares to employee. It dilutions everyone by ~90% and transfer their wealth to the employees. Yet the company still as sound as it was. The company is not losing money or going to bankrupt. In fact it can issue another 10,000,000 shares to employee tomorrow. It is not happening not because company will lose money. It's because the shareholder will lose money and they will not approve it.
Following is response to your post. Summarize in two point:
1. Company do not buy options to issue to employee. It print them.
2. You see a phantom sale of stock/options. This is correct. But it is necessary to offset a phantom expense.
First, option company issue DOES NOT have to be bought. In fact, I don't remember any company buy leap calls and give them to employees as an option grant. Options are CREATED (printed or whatever) and causes a dilution to shareholders. Option does not make a company from cash flow positive to cash flow negative, from a debt free company to a company with debt, from a profitable company to a company losing money. It just make each shareholder shares worth a little less. It does not cost the COMPANY anything.
You said the company does not sell options to realize a gain. The point I am trying to make is IF you want to expense option you would also want to book a gain which offset the expense. Because giving option to employee is EQUIVALENT to selling option and give the money to employee. You regard the sale as phantom, but you don't see that THE EXPENSE IS PHANTOM TOO.
Here I will say it again: Option does not transfer wealth from company to its employees. What it does is transfer wealth from shareholders to employees. Therefore the company loss nothing.
Have you ask yourself why company are not more hesitate to give out stock options if it cost the company something. It is not the company's money but the shareholder's money.
Tim |
