OT ... Pete, re "for me, the nontransferable provision of employee stock options make them worthless. If they can't be sold, IHO their value is ZERO."
A dogmatic statement of opinion, without support, .. isn't likely to be very persuasive .. to me, or to anyone else. More influential is a cogent argument, such as the following excerpt from "For the Last Time: Stock Options Are an Expense" by Zvi Bodie, Robert S. Kaplan, and Robert C. Merton, Harvard Business Review, March 1, 2003. harvardbusinessonline.hbsp.harvard.edu
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"Imagine two companies, KapCorp and MerBod, competing in exactly the same line of business. The two differ only in the structure of their employee compensation packages. KapCorp pays its workers $400,000 in total compensation in the form of cash during the year. At the beginning of the year, it also issues, through an underwriting, $100,000 worth of options in the capital market, which cannot be exercised for one year, and it requires its employees to use 25% of their compensation to buy the newly issued options. The net cash outflow to KapCorp is $300,000 ($400,000 in compensation expense less $100,000 from the sale of the options).
MerBod’s approach is only slightly different. It pays its workers $300,000 in cash and issues them directly $100,000 worth of options at the start of the year (with the same one-year exercise restriction). Economically, the two positions are identical. Each company has paid a total of $400,000 in compensation, each has issued $100,000 worth of options, and for each the net cash outflow totals $300,000 after the cash received from issuing the options is subtracted from the cash spent on compensation. Employees at both companies are holding the same $100,000 of options during the year, producing the same motivation, incentive, and retention effects.
In preparing its year-end statements, KapCorp will book compensation expense of $400,000 and will show $100,000 in options on its balance sheet in a shareholder equity account. If the cost of stock options issued to employees is not recognized as an expense, however, MerBod will book a compensation expense of only $300,000 and not show any options issued on its balance sheet. Assuming otherwise identical revenues and costs, it will look as though MerBod’s earnings were $100,000 higher than KapCorp’s. MerBod will also seem to have a lower equity base than KapCorp, even though the increase in the number of shares outstanding will eventually be the same for both companies if all the options are exercised. As a result of the lower compensation expense and lower equity position, MerBod’s performance by most analytic measures will appear to be far superior to KapCorp’s. This distortion is, of course, repeated every year that the two firms choose the different forms of compensation. How legitimate is an accounting standard that allows two economically identical transactions to produce radically different numbers?"
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re "In my experience preparing the disclosures you mention, company managements see them as an absurd waste of time and cost because they see them as meaningless and flawed. That's why 98% of companies chose to continue with the APB 25 methodology I support which views and treats employee stock options as capital raising transactions."
I reject that argument as frivolous. Given two choices on option treatment via FASB SFAS 123, do you really think many managements will voluntarily choose the method that reduces reported net income? Get real!!
Regards, Ron
P.S. What is "IHO"? |
