To Expense Options Or Not
from the the-debate-rages-on- dept
As the debate rages on about whether or not companies should expense options, Intel is getting ready to announce that, unlike many other companies, they’re going to stick by their policy of not counting them as an expense. Meanwhile, the Federal Accounting Standards Board says they’re going to explore whether or not it should be required to expense options. This should lead to a bunch of fun arguments. In a related story, the SJ Merc is running an article about an academic who is getting a lot of attention for being a strong advocate of expensing options.
Comments on “To Expense Options Or Not”
options expensing
its a heck of a conundrum.
first: options are already accounted for in fully-diluted sharecount numbers, the number most commonly used in calculating earnings per share.
thus, counting them as an expense then counts them TWICE on the same sheet.
problem is, people (average investors), aren’t looking at financial footnotes to see if sharecount #’s will be increasing.
2) so say you expense them– how do you expense them? the current FAS123 black-scholes model is a farce. Cisco just recently said that they would have to expense over a $1bn in options, even though they are only worth $110 million now.
conclusion: the trick is to either find a clever way of expensing them, listing as a liability (rather than expense), or letting the sharecount number do its job.
fact is, they don’t cost companies money. Giving away shares isn’t hurting the company at all, just shareholders (because more shares dilute their stakes). The only perceived cost is the opportunity cost– that the firm ‘could have’ sold those granted shares to a stranger for $.
in my opinion– FAR GREATER problems out there than options. Like the fact our president/VP are corporate leeches in a time of corporate infamy, and the media refuses to look at that. (hey, they’re corporate too).
Re: options expensing
I understand the difficulty in assessing their value. I personally think there are enough smart people around to come up with an intelligent, fair, and consistent way to expense them. It’s a pretty hard thing to determine the value of goodwill, but it’s still done & reported on the books when necessary.
I get your point that they don’t cost companies money (more or less). But as you point out, they do cost the shareholder–as a shareholder, I don’t like the idea the the company can give away millions of dollars (to fellow board members or employees) which hurts the value of my stock, and yet I have no say in the matter. Though I guess that’s another issue entirely, but perhaps all options should have to be approved by proxy?
What it keeps coming down to for me is just a simple straight-forward question: Are the options a cost of doing business? They are a part of employee compensation–why should they be treated differently than the cost of say medical benefits or 401(k) matching contributions? I just can’t see a concrete line in the sand. Companies like Cisco and Microsoft have gotten away with paying employees much much lower salaries beause of the options that come with the job. While still not concrete in terms of an accounting answer, that provides a pretty fair indicator of the value of the options. Hypothetical example: two identical employees(not that there is such a thing), one for Microsoft, one for a company that doesn’t offer options. The MS employee makes $50,000 per year (plus options). The other one makes $75,000 per year. Looks to me like the options are worth $25,000 per year. The value of the options are whatever they save the company as a result of lower salaries, because without the options, they would have to pay higher salaries.
A few other points–options provide publicly traded companies an unfair advantage over private ones–making companies expense them evens the playing field. And second, the options culture is dangerous. There are a lot of “Microsoft Millionares” who are bankrupt. Margin calls and the inability to cover, along with the considerably lower base salary put people at risk. I’m not necessarily saying they shouldn’t be responsible for their own choices, but the fact is it’s almost like gambling in some ways. People take the lower paying jobs for the opportunity to win big in the options game, and can end up in a world of hurt.
steve snyder