Skeeter: RE: <so are you saying that the current shareholders didn't lose anything?>
At the date options are granted (when market price = option price), current shareholders have lost nothing. As recipient employees add value to a company (their job), all current shareholders (including holders of employee stock options) participate in the unrealized appreciation in the share price from date of option grant; partly offset by the dilutive effect from the options on EPS. When option holders exercise their option and buy shares from the company, they realize not profit - in fact they pay the company the agreed cost of the shares under option. When such shares are resold to future shareholders, such employees realize their proft which is paid to them by the future shareholder, not the company. It really is as simple as that. However, current shareholders do also benefit from the future profits generated by investing cash in the business that would have been paid out to executives as compensation.
RE: < the method of compensation can drastically change the reported eps - FOR THE EXACT SAME BUSINESSES.>
The method of compensating employees is an example of many business structuring choices managements make daily. A business that compensates employees by cash salaries incurs a reduction of its' net worth in the amount of cash paid out. A business that issues stock options to employees has no reduction to net worth because no assets are paid out and no liabilities are increased. These two structuring choices are NOT the exact same business as you assert. Absent a reduction of assets for cash paid out, those who would charge earnings (and ultimately Retained Earnings) with stock option expense have proposed increasing the "Paid in Capital" account by the same amount - a net ZERO EFFECT on STOCKHOLDERS' EQUITY. This proves the point that such compensation is paid to the Bill Gates' of the world by those purchasing company shares from current shareholders in a shareholder-to-shareholder transaction that has nothing to do with the company. Follow the money, Skeeter. Ultimately, the accounting has to reflect cumulative cash inflows and outflows, otherwise it's bogus !
If Mr. Warren Buffett transforms option granting companies he acquires into cash compensation companies because of a belief that such companies seek to hide their "true compensation costs", I'd have to agree to disagree with him on that choice.
Sorry, Skeeter. While your response to my explanation of the stock option issue was an outstanding effort, I'm unmoved by your comments. I believe your comments exemplify the confusion caused by the recent requirement for companies to disclose a theoretical options expense in their footnotes and its effect on EPS. Imho, such disclosures are totally bogus and misleading for the reasons stated above and in my original post.
P
|
