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Technology Stocks : Qualcomm Incorporated (QCOM) -- Ignore unavailable to you. Want to Upgrade?

To: The Reaper who wrote (125846)	12/5/2002 10:42:51 AM
From: Wyätt Gwyön	Read Replies (3) \| Respond to of 152472

shouldn't there also be an adjustment to income if the price of the common stock declines thru the course of the year after those particular series of options are issued no. and for the same reason, there should not be an adjustment to income in the other direction if the stock price rises "thru the course of the year after those particular series of options are issued". and here is the reason: options are a form of compensation, in and of themselves, at the time they are granted. let's say an executive has $1 million cash compensation (the max that a corp can deduct for taxes), but has a target total compensation of $10 million. well, the other $9 million will come from options. the co actually gets a break because the options are amortized over the holding period (say 10 yrs), so, to be simplistic, they only recognize 900K in year 1. but in year 2, they issue the dude another $9 million worth of options. so tack on another 900K, and the option expense in yr 2 is 1.8 mil (second 900K amortization from yr 1 + first 900K amortization from yr 2) for the co (even though the exec has received $18 mil in option compensation so far). it will take till yr 10 (or whatever the full amortization period is) in order to get a "full cycle" of ten 900K amortizations stacked together on a rolling basis, reflecting the ongoing $9 million annual cost that the co is giving this exec. there are cos which have salary setups that will enable certain employees to become centimillionaires over a decade based on a very modest share price rise, even though their cash salary is 500K or so. so the point is, if the stock is at 50 in year 1 and those options for that year become worthless as the stock plummets to 10 in yr 2, no matter, because another $9 mil will be issued with a strike of 10 in yr 2 (and this does not even broach the subject of options with strike prices well below market, nor the issue of whether the exec may have already hedged his $9 million value from yr 1). once you get the full stack of 10 amortizations, you just have a rolling expense recognition. remember, the total option value each year is $9 million, whether the stock is at 10 or 50 (although obviously they need to issue a lot more options at 10 to get a $9 million value). this is the reason why a number of cos announcing they will expense options are showing only mild EPS reduction in yr 1--because they are only expensing the first yr and have not yet worked up to the full stack of amortizations. so the point of the expense recognition on the income statement is to see what the ongoing expense proposition is for the company, so that we can gain an accurate picture of its economic reality. To me that fact alone suggests to me that stock options should not be expensed until the company has to go out and actually buy its stock to satisfy the exercise of those options. that's not how options work. the co just creates the shares out of thin air (obviously, they cannot create more shares than are allowed by shareholders, but shareholders can always raise this number). whether or not a co buys back shares on the open market to offset this dilution is up to the particular co. MSFT spends about $6 billion doing this, without appreciably reducing their total share count (as i recall), and they don't book that $6 billion as an expense against earnings! on the other hand, CSCO for most of its existence has simply let its share count rise. as a result, there are now more shares of CSCO outstanding than there are human beings on this planet.