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To: Don Lloyd who wrote (29123)	2/24/2003 11:12:37 AM
From: Stock Farmer	Read Replies (2) \| Respond to of 74559

Don, We are getting closer to mutual understanding. Agreement may still be a long way off ;) I suspect that even in the case where the share count were perfectly clear, you would still have another complaint that the benefit that employees receive in the form of stock is not expressed in dollars and charged to the company. Very close. If you'd taken away the "and charged to the company" we would agree entirely. I care less who it is charged to, 'cause I'm going to subtract the dollars in which this cost is expressed from what the company itself generates in order to figure what shareholders get in the end. I just happen to think it's way more convenient for everyone concerned if the counting in dollars is done by the smart guys at the company who have all the necessary information at their fingertips, and then, while they're at it, they could do the subtracting too. I want to compare makers of Routers to makers of Dog Food in terms of the expected increase that they might make to my net worth. So I'm up some dollars, down some shares and up some dog food on inventory and down some raw ingredients I'd rather not know about... and so on. That dogs breakfast of differing parts to the whole value equation is hard to keep track of. Let alone compare to my alternatives. Reducing it all to dollars renders the process easier to handle. If management is informing me that in order to make puppy chow, we need to promise all employees they'll be millionaires in three years before the little prima-donnas show up to work, then either (a) I need to factor in the source of the millions necessary to attract these fine folk, or (b) tell management to stuff it and go find a way of getting the job done while paying employees less. Maybe we could pay 'em in puppy chow instead. But I'd still have to figure out some metric of cost for that too, and reduce it to dollars and toss it in the mix. 'Cause that's what it takes to run the business, and that's the question to which I want the answer. The reason this "accounting mischief" is important (to me) is that it merely helps dimension the price of a slice. I'm one of those simple minded individuals who thinks that earnings reports aren't created for the benefit of the CFO, but to reflect some information to me. And that this information isn't coming to me 'cause I have chronic insomnia and need a sleep aid. Amongst many, one of the purposes is to help me figure out whether the market is offering me a good price or not. Which we figure out by how much profit they are generating. If a company uses no stock options, then I can expect the price of a slice to be based on the profits that the company generates. However, if a company uses stock options, then I can expect the price of a slice to be based on the profits that the company generates, minus what it costs owners to redeem slices from the employees, plus whatever the owner gets when the employees exercise. That is, to a sole owner. And personally I can't figure out a reason why a company would be worth more or less to a sole owner than it would be to a group of N owners. Except that the shareholder meetings might be a lot easier to hold. So to me, for my purposes, the company deserves no different price than what a sole owner would reasonably pay if he had to pick up the tab for running the business himself. The whole tab. Which includes stuffing the pockets of prima-donnas the dollars that they get for Christmas in their stock option stockings. I can either do the minusing myself or I can ask the company to do the minusing for me. But it's gonna get done. And sorry Don, but it does have to end up in dollars 'cause that's the currency I use to buy the company. It could be Yen or gold or Q! for that matter. If I used them. But dollars is what I use. As for this: The tax deduction that the company receives is not tied to the taxes that the employee pays, but is justified by the dilution injury to the shareholder owners, even if the company reports no expense for non-cash compensation. Bunk. The tax deduction that the company receives is because it claims the income on which the employee is taxed as a cost to the company in its reports to the IRS. It just doesn't make that same claim to shareholders. It's justified because the "dilution injury" is precisely equal to the cost that the company reports. Which is precisely equal to what employees put in their pockets. You think the IRS would allow companies to over-state the dilution cost? LOL A company is located next to a ski resort. Every employee is given a free off-peak pass to the resort and its facilities. The owner of the resort supplies the passes to the company absolutely free in the hope of gaining additional business for his concessions. The passes may be extremely valuable to the employees, who probably self-select themselves as employees in part because of the passes and the company location. But no matter how much the employees value the passes, they still cannot be an expense to the company. More bunk. If GM gave automobiles to employees, are you now going to tell me that they shouldn't chock up an expense? How about the US Mint, what if it gives twenties to its employees? There is no question that value is being exchanged and cost is being incurred. Whether it's as little as a ski-pass or as large as an SUV, value is exchanged. Shareholders lose an opportunity cost in the transaction. Employees gain an opportunity cost. When the opportunity cost is small, we turn a blind eye - no sense haggling over pennies while pounds fly out the window. But when the size is material we add it in. Whether we choose to ignore something or not does not make it vanish. And you may think a ski pass only costs the ink on which it was printed. But it also costs another person in line at the lift. It costs increased insurance risk. It costs crowding in the change room and delay at the concessions. It costs interference down the runs and takes up empty space in the parking lot. It costs the amount that the employee might have paid if you'd given him a chance. And it also costs the paid ski passes that don't show up 'cause of the sum of those insignificant costs. Imagine if your favorite ski hill gave away 20,000 "free" passes for this weekend. Would you be likely to go, or would you avoid the zoo? Would that not cost something? Maybe there is value in the advertising. But one is a benefit, the other is an expense. Profit is the net of the two. Reaping the benefit without taking account of the cost is precisely the nifty little trick that companies have been playing on the First National Bank of the Clueless. Sorry, but your ski lift passes are a non-zero expense. However close to zero they may actually be. And however hard a time you might have to quantify it. Just because there is uncertainty in the economic value on either side of this transaction does not mean that it is zero. Just that it is uncertain. The purpose of "accounting mischief" is to establish reasonable guidelines to approximate in the presence of uncertainty. Which guidelines apply equally fairly (or unfairly) across all sorts of businesses, from router companies to dog food companies. Or Auto makers to ski-lift operators. Nothing is "being equalized away by accounting mischief", just reported as what is really going on, in terms that an objective third party observing on the situation would find reasonable. As far as stock options and the economics? Cash is actually being transferred into the pockets of employees. This cash is coming from somewhere and for some reason. The cash is actually coming from shareholders. And it is arising from a wage debt incurred on the shareholder's behalf by the company to the employee. Now, we can pretend that this actual cash flow is merely a fiction of some accounting hanky panky, or we can wake up and smell the coffee. Cash ending up in employees pockets as a result of doing their thing is compensation. Period. Which is a quantifiable and certain expense. Of somebody. We can furthermore pretend that the company had nothing to do with this. Like we can pretend that small equals zero. But aren't we adults, with adult sized brains? Who handed out the stock options? Who decided how many Fred would get for being awake at the switch all day? Who determines the degree to which Fred is being compensated? The hand that don't touch the money aren't necessarily pure. If you say "Kill the man, Guido"... it's not only Guido's neck in the noose! There is real money flowing. It is compensation. It is incurred by the company for the benefit of the company. But it's a fiction? A product of a myth? I guess we disagree. I prefer that "accounting" is done for the purpose of informing me what it actually costs to operate the business - either directly or through shareholder subsidy. You prefer that the books accurately report only the flows into and out of the accounts of the company. Both are perfectly valid stances. Mine is the "what does it take to earn this kind of profit" perspective. Yours is a "what are the specific actions of the company" perspective. At least that's how I see our differences. John