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The Coming Expensing of Employee Stock Options
Posted by
Hemos
on Mon Jan 10, 2005 08:30 AM
from the big-changes-coming-down dept.
from the big-changes-coming-down dept.
An anonymous reader writes "This accounting change will reverberate loudly throughout geekdom.
"Users of financial statements...expressed to the FASB their concerns that (the current handling of stock options) results in financial statements that do not faithfully represent the economic transactions affecting the issuer, namely, the receipt and consumption of employee services in exchange for equity instruments. Financial statements that do not faithfully represent those economic transactions can distort the issuer's reported financial condition and results of operations, which can lead to the inappropriate allocation of resources in the capital markets." Taken from FASB Statement of Financial Accounting Standards No. 123 (Dec 2004). A
FAQ has been published as well." Yes; the data is from 12/16/04, but this will be a huge change in how tech companies work.
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Stock options? (Score:5, Informative)
Actually, with the tech implosion back in 2001, this affects technology companies less than we would expect. It was put in place to catch companies that were writing off massive amounts of tax through the issuance of options. However, with fewer companies doling them out, and employees less enthused about receiving them, this new regulation affects the old bricks and mortar companies more than those in the tech sector.
Re:Stock options? (Score:4, Interesting)
Dot-com era tech companies aren't the only ones that used stock options as incentives. Our fortune 500 company of over 200,000 employees has traditionally distributed stock options to its management employees as part of a bonus package. This year they won't, but it remains to be seen if we'll get cash, straight-out stock, or a screw-job.
Parent
Re:Stock options? (Score:2)
Re:Stock options? (Score:2)
Re:Stock options? (Score:3, Interesting)
Ehh, sort of. You don't "write off" options. You don't pay anything for options, the shareholders end up eating the cost, so there's nothing to write off. Salary, under $2million, is tax deductible so you would write that off. This was imposed so that people could more easily view a company's true earnings, factoring in work done by employees that was compensated by the shareholders (via o
Eh. (Score:3, Insightful)
Can someone please translate it into plain english for those of us who either A) have never had stock options or B) are just too dumb (me perhaps) to decipher what was said?
Re:Eh. (Score:5, Informative)
Now they have to expense them using "fair value", which is what an investor would currently pay for an equivalent option. This, in theory, will more effectively represent employment costs.
Parent
Re:Eh. (Score:5, Informative)
It also allowed a fun little scam in that the tax man allowed you to expense your stock options and subtract it from your profits before paying tax. This is why MS and others spent several years not paying tax. What they were actually doing is NOT MAKING MONEY. All their profits were going straight to the employees, and noone noticed as it was coming back in as they were issuing extra shares. A lot of MS' cash pile came from selling shares.
Basically there were two very different ways of acocunting for the same thing. If you pay your employees in cash, then issue extra shares to have the money to pay for it, it comes off your bottom line as it should. But give them cheap shares instead and it doesn't. The end result is the same, x extra shares issued, y extra money to empoyees, but one means you are in trouble, the other is a sign of a really healthy company. Until now. It is a good change.
Parent
Re:Eh. (Score:2, Interesting)
http://www.billparish.com/msftfraudfacts.html
o r here:
http://www.usagold.com/gildedopinion/micros oftfrau d.html
"3) Convincing Employees to Take Less Real Wages: Microsoft aggressi
Re:Not a scam. (Score:4, Informative)
Parent
Re:Eh. (Score:3, Interesting)
Except that a stock option is not really a "cost"; it does not deplete the company's assets to issue them. If any dilution occurs, it is when shares are issued and/or set aside for the purpose of issuing s
Re:Eh. (Score:5, Informative)
Not true. At the risk of repeating myself from my other post. Compare two cases. Company share price is $100 dollars a share
Case 1 : Company issues 100 extra shares at $100 (total $10,000), gives $5,000 cash bonus to employees, keeps other $5,000
Case 2 : Company gives 100 share options to employee with a strike price of $50. Employee pays $5,000, then sells shares for $10,000
In both cases 100 extra shares are issued, the company gets $5,000 and the employee gets $5,000. Yet the accounting treatment is completely different. In case 1 they have to make a note that they have issed 100 new shares, and take a hit of $5,000 additional expenses. Under the previous rules all they had to do was make a note that they had issued 100 extra shares. The company IS losing money as they are not getting full value for the extra shares issued. The real loser are the other share holders. with the diluted value of their holding. Say a company has 100 shares outstanding share price $100. The company is worth $10,000. I own 10 shares, value $1,000. Now they give the share options above out. The company is now worth $15,000, the value before plus the $5,000 extra cash they made. But I have only 5% of the company, not the 10% I had before. So my shareholding is now only worth $750. Clearly in the real world the numbers are different, and it can take a while for the market value to converge with the "real" value, but the principle applies. Giving out share options is an expense, they should be treated as such. Clearly accuratly costing these things is damn hard (there are rather a lot of books on how much share options should be worth). But it is only real money going out when the option is exercised so it *should* all come out in the wash. There are lots of things that are hard to put a price on in accounting, where they just guess until they know the real number, so there is no real problem with that.
Parent
Case 3 (Score:2)
Stock options are issued in advance before they may be redeemed. Also, they may not always be redeemed as in the above case (unless you are in an idiot). If anything, the options should be listed under a "Risk" category, not under expenses as they may or may not be redeemed.
Re:Eh. (Score:2)
So, unless I am wrong about my assumption that shares are only created and reserved for options explicitly by shareholder v
Re:Eh. (Score:2)
Two things: (1) you cannot give infinite options, so it is indeed somewhat like a cost, and (2) you are giving options in exchange for work. Without a valuation on the options, you don't have an accurate measure what the cost of your employees are. If I had a highly increasing stock, and I had employees that would just work for options, could I honestly say that my labor cost was zero? If my stock
Re:Eh. (Score:4, Informative)
If you didnt get stock options before, you still get none.
Investors are affected, since over time the talent leaves a company and the company loses innovation and just maintains their current product.
Accountants in find new creative ways to fake out the investors. This still has no real advantage
Take my post with a grain of salt - as you can tell I am against the practice.
Parent
Re:Eh. (Score:4, Informative)
Anyway, how does it make sense that a company paid me 7 figures for a couple of years when I was making high 5 figures. They had to be expensed, it was a crazy situation where your compensation really revolved around luck, when you got hired, what company you went to work for and how many options they gave you.
Parent
keep screwing the little guy (Score:4, Interesting)
that's kind of the point. This rule, just like every other rule made under the Bush administration, is about screwing the little guy at the expense of (a) large corporations, (b) financial institutions, or (c) extremely wealthy individuals. If you go to work for a very early-stage company, and you are one of the first, say, 20 employees, you are really taking a risk- becuase the odds are that your tiny company just won't be around in 5 years. If you have a two kids, a mortgage and a car payment, how do you think it would impact your life if the company you work for suddenly couldn't make payroll? That's right, even with six months' savings in the bank (which you don't have) and a $10k limit on your gold card (of which you've already used $7k), you're going to be scrambling to find work. If I'm going to risk my livelihood for a dream, I expect to be rewarded handsomely.
But a small company can't afford to pay you more in cash than a company like Cisco or Oracle, so that small company needed a way to reward quality employees for hard work and loyalty. That's what stock option grants at startups were about- the company rewards its employees for taking a risk, but is legally still solvent. And yes- it does revolve around luck, and when you got in- becuase if you join a company as the 100th employee or the 1,000th employee, it should be clear that you're making a much safer bet than the 10th employee was when she joined. High risk, high reward.
Under the new rules, there's no easy way to reward early-stage employees for their risk-taking except to pay them more cash. And until the company is doing well financially, an employer can't afford to do that. Catch-22.
This rule change will make no difference to CEOs of Fortune 500 companies, becuase they'll still get paid $lots. It won't change the risk involved for institutional investing, so the i-bankers and vc's will still have the same issues to worry about. If anything, it will make the i-banker's job easier, becuase there is one less number they have to add to the financial statements if the reporting company is putting it in there for them already. It will slow down the progress of startup companies with disruptive technologies, becuase it will be harder for them to motivate quality people to leave their current employers. It's a minor accounting change for a Fortune-500 company, and death knell for the way that startups recruit talent... which is probably music to the ears of those F500 companies who can now pay their regular employees LESS because they don't have to worry about as much competition for their talent.
It sounds like you were the beneficiary (in spades) of the old system- you of all people should recognize the upside! The only real impact this rule change will have is to make it more difficult for very early stage startups to attract and retain quality employees- which is great for everyone, except entrepreneurs, their early-stage startup companies, and their employees...
Parent
Re:Eh. (Score:2)
no problem in today's high tech sector.
you mean the outsourced folks who NOW have our jobs now will leave their jobs because of this new law?
they live in 3rd world countries with a lower standard of life than here in the US. stock options are NOT what they are going to lose sleep over.
bascially, this new law is like an admission that company loyalty is 100% dead
Re:Eh. (Score:2)
Even if that's the trend, the "talent" will have to go to companies that don't issue stock options (because if they did, they'd have to expense them, thus drive off talent). Since stock options are apparently functioning as talent incentive according to your tone, the talent will be obtaining other incentives from the companies they end up in. Those incentives
Here you go: (Score:5, Insightful)
[Stock options result] in financial statements that do not faithfully represent the economic transactions affecting the issuer, namely, the receipt and consumption of employee services in exchange for equity instruments...
Stock options amount to the company giving money to employees...
Parent
Re:Here you go: (Score:2)
Re:Here you go: (Score:2)
Anyway, in some senses, employees may be better off. Eventually, companies will have to compensate you or risk losing you to a competitor. If they com
Re:Here you go: (Score:2)
I meant that it amounts to giving money, because granting options amounts to giving shares (at the time the options are exercised), and those shares have monetary value to the employee.
You are correct that granting options does not affect the company's books. That is the counter-argument offered by the tech industry.
However, in general I agree that the practice of expensing options should become mandat
Huh? (Score:2)
The article seems to imply that all companies that use stock options do so to basically lie to thier investors, and once they must account for them in a more obvious way, geeks will be paid less.
Pretty blatent bias, when the article notes 750 companies are already in voluntary compliance with the new rules.
Who Gets Stock Options? (Score:5, Insightful)
Just work a 40-hour week (Score:2, Insightful)
If you're good enough, it'll work.
Re:Just work a 40-hour week (Score:2)
Does it mean LESS stock options, or not? (Score:2, Interesting)
But will it really change the packages on offer? I guess that everyone from CEO down wants to retain stock options. They will just look more expensive to investers i.e. they will get a better view of a firm's financial behavior.
The relevance to slashdotters, is of course that tech companies have had the growth profile and preferred this "cool" way of rewarding directors and staff.
Mostly implemented (Score:3, Interesting)
Jerry
http://www.syslog.org/ [syslog.org]
Why this is important.. (Score:5, Insightful)
This will not only change the way that tech companies operate and report, but other huge publically traded corporations. When a company lures a big name CEO/CFO, and promises hundreds of thousands or millions of stock options to be exercised at a later date, that dillution of equity (even though in the future) was not being properly declared on the financial statements. Now that the FASB (financial account standards board) has made this recommendation/ruling, companies must comply.
This is what one might call "truth in financial reporting", and I'm very glad to see that this has passed. This has been a very long existing loophole that large companies have used to the detriment of our investment community, and the general public (i.e. our domestic economy) as a whole. Don't be blindsided by the rhetoric that only "tech companies" will be affected by this -- there were a LOT of big corporate powers that did not want to see FASB rule, and whenever you have that, you always have to wonder what their reasons are. I encourage you to read the FAQ, and read any news articles you can regarding this ruling. I think you'll agree this is a very positive thing.
Re:Why this is important.. (Score:2, Interesting)
Microsoft has fought this since it was first suggested. Some reports put Microsoft at a loss instead of profit for several years because they (Microsoft) were able to hide employee expenses in the stock options.
It remains to be seen if this rule change will have much of an affect outside of reducing stock options more than the dotcom bubble burst did.
Re:Why this is important.. (Score:2, Interesting)
"Yes; the data is from 12/16/04" (Score:2, Funny)
Stock Option for Dummies (Score:2, Informative)
Three years later, when Google sells for $100 / share and you cash in your option, Google will pay the difference b/t the share price and the option price (in this example $50). This is an expense which is tax deductible. Such a deduction creates a GAIN. The gain can be cl
Re:Stock Option for Dummies (Score:2)
YOU DO NOT HAVE TO ACCEPT OPTIONS IN LIEU OF CASH. This is a decision each employee makes. You can, in theory, accept a lower pay of pure cash instead of a "higher" pay composed of stock options.
I am intruiged by your theory and I wish to subscribe to your newsletter. Seriously, how do you propose that I get my employer to give me cash instead of stock options?
To save time, a little proforma (Score:2)
[ ] don't get stock options
[ ] don't work for a listed corporation
[ ] don't work
[ ] am not human
YOU INSENSITIVE CLOD!
Dupe! (Score:2, Informative)
Yes; the data is from 12/16/04, but this will be a huge change in how tech companies work.
It was mentioned in Slasdot [slashdot.org] on 12/17/04
Hmmm... (Score:4, Interesting)
1. It is not really possible to properly account for option grants vis a vis cash vaule because: a. options are a hedge AND b. options may not be cashed out (employee leaves/dies, stock is underwater)
2. If 1 is true, then you get an equally distorted view AFTER this decision as before
The argument that investors will have a better idea of the business as a result of this is not really accurate, either. After all, institutional investors already follow option grants, so this isn't hidden. If you don't follow this kind of data for any company you invest in, you're simply willfully ignorant.
Re:Hmmm... (Score:2, Informative)
Stock options without the pre-existing risk are speculative securities, just like stock or any other financial instrument. Employees earn income from stock options; hence, the company should record expense.
While it's true that options may not be cashed out, the accounting standard allows for companies to adjust the exp
Double accounting (Score:4, Insightful)
The problem with stock options were the immediate grants. The idea behind stock options was to give the people in the company- not just the upper level management, but everyone- a stake in the company. A stake in the long term prospects of the growth- especially if the options you're granted now can't be exercised for five years. All of a sudden not only are you less likely to quit (and lose those options!), you're more concerned about where the company will be five years from now.
The problem is with the CEOs getting multimillion dollar stock grants, on pennies on the dollar, effective immediately. This encourages to pump up next quarter's numbers by any means, hook or crook, so they can dump their stock. And to heck with where the company will be a year, let alone five years from now.
But hey- given a chance to throw the baby out but keep the bathwater, would we pass up the chance?
Brian
Re:Double accounting (Score:2)
This change will make stock options for anyone except the top most layers of management a thing of the past.
Quite the contrary. Some companies will give up issuing stock options all together (Microsoft has already basically done this, good for them). Others will decide that it is not practical to issue thousands upon thousands of heavily discounted options to executives. The formula to calculate how much to expense an option specifies that the more an option is discounted, the more it is worth, obvio
Ho hum... maybe. (Score:2)
Yes; the data is from 12/16/04, but this will be a huge change in how tech companies work.
Not without another period of insanity like the '90s.
As many other Slashdotter have pointed out, stock options don't mean much unless you work for a stable organization (like Cisco, which is the king of employee stock-option grants AFAICT). And of course if those options have a chance in hell of being above water at maturity or later.
The change is actually good news for shareholders, and will force companies to ac
Fine with me (Score:2)
But they're not "expenses"! (Score:2)
Stock Options are not a panacea... (Score:2)
The last stock options that were issued by my company was several years ago. Since then they have been issueing cash bonuses instead - which those of us holding worthless options welcomed.
(I am hoping the stock market will climb again so I can exersize the options I am holding, but I doubt it will go high enough for those options there were giv
Re:Forget the option just give us the stock (Score:2)
And this is how I understand it would work in the UK
If you take them now, you pay income tax on them.
If the price goes up and you sell, you pay capital gains tax on the profit.
Capital gains tax is charged at a different rate to income tax.
Wait until the price rises then cash in your options and sell.
You then only pay the income tax as the gain between the time you exercised your options and when you sell them is less.
If you do this at the start of a financial year and plan to take a break from
Re:Forget the option just give us the stock (Score:2)
Re:Forget the option just give us the stock (Score:2)
Also, if the company gives you actual shares, that does not mean that you have to sell them immediately. You could hold on to the stock, wait for it to go up or down, and since you are given something of actual value, you will always profit, unless the company goes under. This could also be advantageous as it eliminates the conflict of interest that managers have when giving out dividends (Since management usual
Re:16th month? (Score:2, Insightful)
You clowns have to realise some day how totally screwed up a nn/nn/nn date format is when there is no universally accepted positional meaning.
When Slashdot converts to ISO standard, I'll be happy.