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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Michael Bakunin who wrote (76332)	2/20/2000 10:02:00 PM
From: Don Lloyd	Read Replies (1) \| Respond to of 132070

mb - [[I think I realize why we will never be able to settle our argument in re: employee options grants. That is because accrual accounting is not inspired by economic costs, and your thought experiments are. I'm not wedded to accrual accounting, but when it comes to reporting to shareholders, GAAP is the best we've got. I criticize GAAP's flaws, while you appear to criticize its basis, accrual accounting. Am I wrong?]] You may, in part, be correct, but the distortions are real and have real world impacts. Fundamental flaws in both accounting and market valuations, as well as quirks in the tax code, lead the corporations to act in ways that are rewarded and to avoid actions that are punished. As long as the market value of stocks is determined on a purely momentum and technical basis, the real operating fundamentals of a corporation are almost irrelevant. In this case the accounting procedures are only important if they change. However, any notion that shareholders have implied ownership of corporate earnings must be thrown out the window. My specific objection to compensation based expensing is that the effects of post grant stock price changes are 180 degrees in conflict with reality. If there is an attempt to expense this phantom compensation, its value will naturally rise with the stock price at time of exercise. This is backwards. Both the corporation and the employee benefit directly from a higher exercise price. The corporation benefits from the higher tax deduction that comes from a larger difference between exercise price and grant price. In addition, there is an indirect effect in that a history of large gains will increase the amount of salary that employees are willing to forego for future option grants. It is a fundamental economic law that mutually beneficial, voluntary exchanges are not zero sum. Gains of one party do NOT imply losses for the other. Regards, Don