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Technology Stocks : Intel Corporation (INTC) -- Ignore unavailable to you. Want to Upgrade?

To: Saturn V who wrote (174520)	5/13/2003 6:53:19 AM
From: Stock Farmer	Read Replies (4) \| Respond to of 186894

A long standing principle of the IRS is that personal income is a matter of fact, not speculation. For this reason, employees are taxed on income stock options, but at the time when the income is a matter of fact (e.g. at exercise). Changing accounting for stock options won't affect this principle or employee taxation. The debate on whether or not options are or are not a cost is amusing and has spilled over onto many different threads. Options are a cost, of course. It's just that the amount of this cost is unknown at the time of grant. Let those who think they aren't a cost go without them forever. I think we can dispense with this silly part of the argument. Are they merely a cost to shareholders and not the company? LOL... sure. Imagine how "profitable" our companies could be if shareholders paid all of the expenses and the company got to keep all the revenue? In the end however, as a shareholder, does it really matter? Not if we are thinking like a shareholder. The real issue is what shareholders want to do with this cost. And in the end, what matters is what shareholders think. One camp suggests we just deal with it out the back end. Several years after it has been incurred. We'll call it "dilution" and pretend we've accounted for it fully. One major problem with this is that there's no sense crying over spilt milk. Unless, of course, you are the IRS and you get paid but only in milk and only after it's been spilt. In which case there's no crying either. But it's very costly to scoop up the shares and stuff 'em back in the bottle after the fact. If it's necessary to suffer "dilution", we should be asking management to justify "how much", and compare this estimate with other financial metrics of performance, such as "profit". And we should be doing this in the period in which the IOU is written, not while wringing our hands as it is later cashed. In the end, if every year they give away 5% of a company with a P/E ratio of more than 20, then we are getting poorer! And we should at least ensure that they are forced to explain "why" with a straight face. There are indeed future consequences of decisions taken today. Such as the fact that a stock option grant today has a cost in the future, just like an IOU signed today has a cost in the future. We already know how to account for IOUs. Our problem isn't one of knowing how to reflect future obligations in current results, it's how to quantify the future obligation that the IOU represents. The real problem facing this camp isn't whether or not options are an IOU, but the method by which the size of the IOU is estimated. One approach is to estimate that the cost is zero. Amongst other possible choices, zero is a valid estimate of the cost. It suffers the same problem as all other estimates: it is merely likely to be wrong. However, as an estimate, zero in particular has a few advantages. Firstly, zero is incredibly easy to calculate and is within the mathematical ability of the majority of folks graduating from the American educational system. Secondly, it is quite convenient when paying one's self in these things to write down the cost as zero. That way one can give one's self as large a raise as possible while showing folks that nothing has changed. And by the time anyone figures out how they've been tricked, it's in the past. Third, we can do that same trick with our employees and pretend (at least on the books) that our employees are not in fact five times as expensive per unit work as folks overseas, so that we can be morally outraged while watching jobs go overseas. There are those on the other side of the fence who are suggesting that zero is one of the least likely possible costs out there, and that Nobel prize winning science suggests other numbers that are likely to be less wrong than zero. These people attract a lot of ire. Firstly because their method is harder to calculate than zero and most Americans lack the education necessary to understand the basis of the calculation. It's easier on the ego to distrust something than admit lack of understanding. Secondly, management is terribly concerned that the amount of wages they are doling out for themselves might be brought forth for public review and - gasp - questioned before it is a matter of historical fact. They'd much prefer to operate in the dark, and any attempt to shed light on the subject will send management scurrying like cockroaches. Third, if we account for options as compensation, then the wage cost of our industry might be exposed as obscenely uncompetitive compared to other jurisdictions. As much as we are strong proponents of free trade, capitalism and democracy, that's only for so long as we are the sole beneficiaries. So not only do we find management scurrying to keep option cost in the dark, but an entire community that feeds off of them is scampering around in terror of the implications. Apparently folks would rather close their eyes and remain in the dark than see the harsh realities that a flood of light might reveal. Clearly there are many advantages to being in the "zero" camp. Just like there are advantages to shutting one's eyes when the car goes out of control: if you don't see the other cars, you'll never know what hit you. Ignorance is bliss. At least temporarily. John