Should Companies Expense Stock Options?

A reader writes : "The New York Times is running a story about proposed accounting changes to force companies to expense stock options. Is this a necessary and proper oversight measure to enforce financial discipline on companies that might otherwise have none? Or would this measure basically stop companies from offering fiduciary responsibility incentives to their employees? What do you think about this? What should the final decision be? And what measures should be taken to influence the decision-making process?"

Comments

Fiduciary responsibility incentives?

[Anonymous Coward]

How is the offer of options a "fiduciary responsibility incentive"? With an option, you have no downside, so you have an incentive to gamble all the firm's money on producing a temporary rise in the stock price.

Perhaps this was a typo for "fiduciary irresponsibility incentives"?

Re:Taxes

[Lupulack]

Yes , the companies would get a tax break by this ( their taxable earnings would be lower ) , but a lower earnings would also drive their stock price down.

Imagine the effect on stock price of everyone's favorite enormous software company if they were to report employee stock options as expenses. It would nearly wipe out their earnings , which would drive their stock price down precipitously. Which amusingly enough would also drive down the value of the stock options themselves ...

60% drop in earnings

[khallow]

I've argued in favor of expensing stock options in a number of places in this message, but this represents what I think is the true problem with the current accounting approach.

According to Bear Stearns, there would be a 60% drop in profits if the new rule were imposed. Think about it. Earnings in high tech companies are so dependent on stock options that these companies will "experience" a huge drop in profitability. Conversely, how can you support an accounting trick that buffs the profit of the industry by 150% (the reciprocal of a 60% drop)?

Bottom line. Profits are grossly overstated industry-wide. Why shouldn't we have accounting that reflects that reality? Why should we let this fiction continue? Are we going to forget the lessons of the dotcom bubble? Accounting tricks do work. And investors and employees can and are scammed by them. Finally, why do we need to fight so hard to get valid information about a company? It's just wasting our time which collectively is more valuable than that of a few company accountants.

See here for more discussion of this particular story. That's where I got the link BTW.

Re:Well duh.

[Alsee]

I think several of your guesses are rather lousy. Listing the options as expenses does not take a single dollar out of the company bank account.

What it DOES do is validly reflect that it *does* cost the company value to have granted those options. Had the company not issued those options they could have sold those shares at full market value and had that much more cash. Effectively that *is* what the company is doing, and handing that cash to the optioned employee.

The difference between giving the emplyee that option and him selling the stock, and the company selling the stock and giving the employee the option value in cash, it is pure bookeeping games. The final result is the same therefore the final accounting totals should be the same.

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