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Strategies & Market Trends : Employee Stock Options - NQSOs & ISOs -- Ignore unavailable to you. Want to Upgrade?

To: Gary L. Kepler who wrote (77)	6/20/2002 9:42:55 AM
From: hueyone	Read Replies (2) \| Respond to of 786

Hi Gary: Thanks for your post. I believe all of us here may agree that the accuracy of the Black Scholes estimates could be a problem. Yet accounting for employee stock options as zero on the income statements provided to shareholders has contributed to a twelve fold increase in the value of options handed out since 1993 and in increase in CEO pay from 100 times the average worker's pay to 512 times the average worker's pay over that same time period. Accounting for employee stock options as zero is disguising a massive transfer of wealth from outside shareholders to insider employees that is steadily growing worse, thus reducing viable investment opportunities for outsiders to invest in public markets. Therefore, I believe the Black Scholes estimates are the lesser of two evils---if the alternative is expensing stock options as zero. I believe a third option is to value employee stock options at “actual realized value”---a number I believe both JS and I are defining as the difference between market price and strike price at time of exercise. The disadvantage of this method would be that earnings might be hit dramatically and unexpectedly from time to time with very little warning. The Black Scholes estimates, on the other hand, smooth options cost out over time with an amortization schedule, as well as give the shareholder a heads up that slices of the company have been given away on the date of grant. The advantage of using “actual realized value” is that this represents an actual cost proven by exercise. Perhaps if company management recognized that mass exercise of stock options in one year could really make the books look bad, they would not hand employee stock options out so indiscriminately and irresponsibly. In my opinion, including either the Black Scholes estimates or the “actual realized value” as a charge against earnings on the income reports provided to shareholders would be a significant improvement over the ridiculous zero stock options cost that companies are reporting to shareholders now. The current accounting for stock options (no accounting) has resulted in employee stock option expenses spiraling out of control, terribly inflated earnings numbers reported to shareholders, a flow of capital to undeserving companies and a massive transfer wealth from outside shareholders to inside shareholders. Best, Huey