A Simple Plan To Fix Options Backdating
from the fixing-the-system dept
With so much talk about the options backdating, there hasn’t been much talk about ways to stop it from happening. Thankfully, Andy Kessler has some pretty straightforward suggestions. He starts out by explaining how and why backdating happened — and why it’s sleazy and bad. His suggestion to clean it up make sense. He suggests that options get priced based on an average price over a time period, rather than a single date — but, more importantly, that the IRS not tax option grants, since they really are meaningless until the options are exercised. Finally, he also suggests that companies need to be more transparent about option grants — which was part of the thinking behind the push to have them expensed. However, the problem with expensing option grants is that the expense is basically a made up number that might have nothing to do with reality. So, rather than worry about that, his plan is to just have companies issue a report with the SEC concerning the grants. While it’s always a little worrisome to add even more SEC paperwork, this one seems simple enough to add without too much of a burden. Of course, there’s also another way to prevent options backdating: keep publicizing all the big name execs getting caught and indicted in the latest crackdown so that people realize that it’s just not worth trying to backdate options.
Comments on “A Simple Plan To Fix Options Backdating”
Option can be value!
A lot of people want to make you believed that option cannot be valued, but there are pretty good model that do a great job. It isn’t more a made-up dumber than most of what you find in corporate financial reports, probably less with a 3% error margin.
So stop playing the game, options are compensations and so should be expense at their true value.
The problem with not valuing them up front is it opens up a big tax loophole.
You grant me a bunch of options while I work in the US, I go retire in some low tax haven, exercise the options and bingo tax free pay. Next year I move back to the US.
Re: Options Grants
If I remember correctly from my taxation classes, that’s not true. You still need to pay U.S. income taxes on any income derived from a U.S. source even if you are not a citizen of the U.S. However, the IRS does grant you a credit for any income tax paid on the same income in another country.
Options have value, really
Options have value. Check out your favorite stock websites. You can buy options that expire next month, next quarter, next year. There is a market value affixed (it’s called a premium).
In addition, granting an option dilutes your company’s value.
However, most option grants expire when you leave a company, and they are usually non-transferable. If they are going to be taxed on issuance, they need to be transferable (like Google’s new option plan). That’s the ticket.
As far as the tax haven for individuals goes (mentioned above), that is bunk. US citizens must file US taxes no matter where they live. Same with US permanent residents. Also, any options excersized on US securites is subject to a holdback, and you have to file a W8 if your are a foreign person or entity.
Why don’t they just create a simple registry to track options as they are granted. Actually this seems like a wonderful opportunity for an outside business.
Company A wants to grant options to senior staff. Company A notifies tracking company B which records the date, recipient and strike price. Company B then provides a periodic report on all existing options to company A and the SEC. If Company B has no records then no option has been issued.