SEC Allows Market-Based Options Expensing... Though Questions Linger
from the is-the-market-accurate? dept
Of course, that doesn't mean there still aren't question about how you expense stock options as there's no really good way to know how much they're worth. The standard method for calculating the price of an option, the Black-Scholes method, isn't really accurate for high growth companies -- but it's what is most commonly used. However, there have been some experiments to more accurately price options. Cisco kicked off the debate on this topic a couple years ago by proposing derivatives based on the options that could be publicly traded. Then, Cisco could expense the actual options based on the market price of the derivatives. The SEC rejected this plan, but it appeared that the rejection was mainly on some finer technical points. When another company, Zions Bancorp, proposed a very similar model, the SEC seemed much more willing to along with it. The latest is that the SEC has now approved Zions' plan for options expensing based on publicly traded derivatives. The story at Gigaom provides some of the reasons why this might not actually be a very accurate way of expensing options -- but it seems a lot more accurate than something like Black-Scholes. Also, again, the market has most likely already priced in the real impact of these numbers games into the stock price, so it shouldn't have any real impact. Given the approval, though, expect many other high growth companies to jump on board with similar plans, as it's likely to reduce the "expense" associated with options.
In the meantime, we're still surprised that there hasn't been more discussion about Google's experiment with actually allowing employees with stock options to sell the options themselves to institutional traders. That seems like it could be an even more accurate way of pricing the options, since there will be a real market for them. However, it still seems like it's being used merely as an employee perk, rather than a method for expensing options.