Chuz,
The cost of options granted to employees has been a popular topic for debate, both in the media and in threads like this. I want to point out a couple of things that the simplistic approaches misrepresent. The main issue is the cost, to the company, of options granted to employees, and how they should be accounted for. Currently, the accounting practices allow this cost to be zero. Some of the popular articles have suggested that the cost to the company should be calculated as the price of the shares, when exercised, minus the option grant price.
I think that this is not accurate either. Let me give an example. A company grants an employee options on Jan 1, 1998 when the stock was at $100. Let's assume, for simplicity sake, that the options vest immediately and that the employee has five years to exercise. The employee exercises the options on Jan 1 2002, when the price of the stock is $300. Now, some in the media would have you believe that the company should take an expense of $200 per option in the year 2002. However, the correct accounting practice would be to take an expense of buying a Leap option call, strike price $100, expiring 2003 in the year 1998. Because the option, when granted, has a market value which is the same as buying a call with the same expiration and strike prices.
Another approach might be as follows - the grant of the option can be thought of as an interest-free loan of the price of the option. The company buys as many shares as are needed and holds them for the employee. The employee pays the company when the option is exercised. Thus, the cost of the options to the company is the time value of the money.
What do you think?
- Brian. |
