John,
Yes. But if the three new shares are distributed for $0 each, to three new parties, then what?
Then we have a company still worth $5 with its ownership distributed 4 ways into 4 shares worth $1.25 each.
If we assume that the company actually had a liability requirement to buy back granted shares, then we have a deferred compensation expense equal to the market price of 3 shares. This is $3.75 now, but would track the market price. When stock is granted, as opposed to cash, the expense is not a set-and-forget number, but will vary with the stock price in the future. Just using some arbitrary day's price, or even a moving average price, would be a major distortion of the shareholder impact which is ongoing.
Note that this extreme example shows that any expense calculated from stock market value must be calculated on an after-grant basis using the new share count.
When and if the shares are bought back, then the remaining value of the company will be $1.25 with only 1 outstanding share.
This seems to me to give the same result as you would get with your assumption of cash equivalence, without the time distortions of any arbitrary price.
If you want to combine the deferred expense with the rest of the expenses in your mind, then this is what the expense would be if all granted shares are bought back.
If you set aside the deferred expense, then the effect shows up in the increased share count.
Of course, both viewpoints are complementary and far more realistic than either alone. The deferred expense visibly penalizes management for excessive grants and leaving it out indicates what the cash expenses are.
To look at a given fiscal quarter, you would look at the changes in deferred expenses, and note how much was due to market price changes.
Regards, Don |
