In the second Journal article, "'Kind of Right' Isn't Good Enough," Intel's (INTC, news, msgs) CEO Craig Barrett makes a couple of very good points, while leaving out some other very good points. He begins, correctly, by saying, "Employee stock options do not create a cash cost like salaries or rent, and they do not have a market price since they cannot be sold. To record an 'expense,' companies would have to create an estimate for the value of the options." All that is true.
So why the massive push to put them as a cash expense?
Then he goes on to talk about flaws in the method for estimating the value of the options to be expensed, noting that "Black-Scholes is the only model available." He points out that "this model was not designed for valuing employee options, instruments that are not tradable." That is correct. The Black-Scholes model was not created to help companies value options, and it shouldn't be used for this. (Editor’s note: The model was created by economists Myron Scholes, Robert Merton, and the late Fischer Black to value a call option at any given time. For background on how the Black-Scholes model is derived, click on ”Black-Scholes: the formula that shook the world” at left.)
Again, there is a push to enact legislation using this particular method, which even this author indicates is inaccurate... given CEO's are required to sign off on the "accuracy" of the numbers at the end of the quarter - I see a clear cross purpose here.
Well, if I might offer a suggestion. Intel has a lot of smart mathematicians and Ph.Ds of all sorts. How about turning some of them loose to come up with a better pricing mechanism? Just because Black-Scholes is bad doesn't mean somebody can't come up with an improved way of estimating the cost of options. If folks were really interested in solving the problem, rather than just stonewalling, a little brainstorming might be a good place to start.
This sounds way too much like the old "why don't you come up with something better!?!?!" whine frequently seen when someone has their half-baked idea shot down by superior logic. Too many people are rushing to expense options using a bad formula, and they have the temerity to get upset when someone says "wait just a minute, your model doesn't work". Why is it suddenly Barrett and Intel's responsibility to fix a model that even those who are proposing and advocating it admit is broken? |
