Amy, RE: Only in your unique example, is there a charge to earnings. You seem to think companies wouldn't charge earnings in such a unique case where grant price is less than fmv, when in fact they would have to in that scenario.
You missed my point, Amy.
I wasn't talking about GAAP. I was talking about the net effect to shareholders. Yes, I realize that the picture I painted isn't happening in the real world, it was just for illustration,. If the two scenarios resulted in different outcomes to the shareholders, then dilution alone does not completely account for the option award. And those two scenarios do indeed result in different rewards to shareholders. And that is because options do entail a cost to the company, a compensation cost.
For a real world example, look at Dell, one of the poster boys of options abuse. To prevent dilution that would occur from the options issuance, Dell would sell a put and buy a call, essentially locking in the repurchase price of the stock. Problem is that Dell ignored that there was one other piece to the equation. Dell had already sold a call. Dell had sold a call to the employees that received the options in exchange for compensation. Thus, in reality the sold call and the long call had cancelled each other out, and Dell was net naked a put.
And thus, there have been many quarters as of late when Dell has reported a decent sized net income and yet hasn't put any cash in their pocket. And that is because the expense that was incurred when they granted options. And yet none of this information ever appeared on the income statement, even though Dell has clearly made less money than they reported according to GAAP. Over the past 2 years, the book value of Dell has declined from $6.462 billion to $4.648 billion. This is even though Dell has reported about $4.5 billion in net income over this same period of time, net income that would ordinarily increase the book value of the company. And that is because a lot of that net income was a mirage. Dell was paying out stock options--pieces of paper with real value--to executives and some others. If those options were recorded as a compensation expense, as they rightly should, then the decline in Dell's book value would make a lot more sense. |
