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Strategies & Market Trends : Employee Stock Options - NQSOs & ISOs
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To: Don Lloyd who wrote (718)12/15/2004 12:37:46 PM
From: Stock Farmer of 786
 
Don,

You wrote: If a company issues and sells shares on the market and gives the cash proceeds to the employee, the cash IS an expense.

OK. let's take that as agreed. What if it gives only some of the cash proceeds to the employee? Surely that amount of the cash proceeds given to the employee would be an expense. Same argument.

And if it is the employee who is also standing in the market? Presto... compensation. Regardless of the order in which the cash changes hands. It doesn't matter if the employee unloads the share for $100 and gives the company $100 and the company gives $90 back, versis unloading the share for $100 and offsetting the amount owed to the company versus the amount received and giving the company $10 - keeping the $90. Or even pocketing the share and giving the company $10.

And we know to account for all of those alternatives identically. The company gets $100 in value from the issue and sale of the share, and the company pays $90 in compensation to the employee.

Despite how obvious it is to the vast majority of clear thinkers, this concept boggles the mind of folks who try to watch the cash. Just like that simple pea-under-walnut game suckers 'em in every time.

Perhaps an easy-to-see comparison is helpful.

When a company manufactures a widget that it could ordinarily sell for $1,000 and gives it instead to an employee in lieu of wages, and the employee sells or could sell that widget on the open market for $1,000, the company properly records a compensation expense of $1,000 and the employee properly records income of $1,000. If the employee is required to pay $100 for the widget then the compensation expense is $900.

Does it matter if the company sees cash? Nope. Ever heard of an advertising agency paying its bills at least in part by doing advertising?

Does it matter what it actually costs the company? Nope. The market determines the value the company is required to record as expense.

If folks at Norton were compensated in part by free copies of Norton Antivirus, which can be manufactured for a marginal cost of zero, we would still know exactly how much wages the company is required to record. If the folks at Norton are compensated in part by free shares in Norton it's the same thing.
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