SEC Paves The Way For Market-Based Stock Options Expensing

from the cisco-revisited dept

Since the SEC started requiring companies to expense employee stock options, there have been a few notable attempts at finding market-based methods for deriving the value of these options, in hopes that such a method will result in a more accurate measure than Black-Scholes, an academic formula used for valuing options. In 2005, the SEC rejected a proposal put forth by Cisco that would have seen the company create a public market in its own stock options. It hinted that it liked the idea, but that it needed more work before it could be put into practice. This past December, Google announced a program whereby its employees could sell their stock options to private investors. The purpose of this was simply to give its employees more liquidity and an opportunity to profit sooner, but it seemed to open the door to further exploration of how markets could be used to measure the value of options. Now the SEC has given the green light on a new experiment put forth by Zions Bancorp that appears to be very similar to the one proposed by Cisco. Basically, the company created a batch of securities that mimic its own employee options and then sold them to the public. The market price of these options is then the price used to expense their own options. And as many had predicted, the market price for these options did indeed come in well below what Black-Scholes valued them at, meaning that a company using this method should be able to lower the amount it expenses. It’s still not clear exactly where things will go from here, in terms of further developing these markets, but the SEC’s actions should be seen as good news, particularly for the tech companies that are reliant on stock options as an important form of compensation.

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