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The Coming Expensing of Employee Stock Options 222

Posted by Hemos
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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The Coming Expensing of Employee Stock Options

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  • Stock options? (Score:5, Informative)

    by Dancin_Santa (265275) <DancinSanta@gmail.com> on Monday January 10, 2005 @09:34AM (#11309302) Journal
    That's so 1998, man.

    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)

      by eyeball (17206) on Monday January 10, 2005 @09:51AM (#11309404) Journal
      Actually, with the tech implosion back in 2001, this affects technology companies less than we would expect.

      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.
      • Smart money is on "screw-job".
      • As to giving management Stock Options I think that probably represents a screw-job for the non-management employees. When I see the "value added" from a lot of management and the "value given" against the real work of the company it is the creative worker, the producer (who often does not know that the management is getting so much or so much that is hidden) that is getting exploited and getting the screw-job. And when they fire people to make a management cost savings goal to get a bonus just to re-post a

        • As to giving management Stock Options I think that probably represents a screw-job for the non-management employees.

          Yes, typically. It allows pumping the next few quarters' earnings by cutting costs of research, development, quality control, etc. that will doom the company in the longer term.

          Which is why I advocate that companies make sure the options get exercised many years out into the future, gradually, so that the managers take a longer term view and even hire qualified successors instead of friend

      • Are you aware that you have just admitted on Slashdot to being a manager?
    • Re:Stock options? (Score:3, Interesting)

      by Razzak (253908)
      It was put in place to catch companies that were writing off massive amounts of tax through the issuance of options.

      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
      • While very different in nature and purpose, the potential gain that makes an employee share option valuable is similar to the potential gain that makes a lottery ticket valuable. An individual buys a lottery ticket because it gives the holder the right to potentially receive valuable assets (generally cash) in the future. The payment for the lottery ticket is similar to the option premium paid (cash or employee services) for the share option. Even if the probability of winning those valuable assets is extre

  • Eh. (Score:3, Insightful)

    by Anonymous Coward on Monday January 10, 2005 @09:34AM (#11309304)
    Am I the only one who has no idea what the hell that summary just said?

    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)

      by acvh (120205) <geek AT mscigars DOT com> on Monday January 10, 2005 @09:46AM (#11309376) Homepage
      In the past, companies could issue stock options to employees essentially at no cost to themselves. This would tend to understate employment costs, making them look more profitable than they really were. In addition, the exercise of these options would dilute the value of the stock held by shareholders.

      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.
      • Re:Eh. (Score:5, Informative)

        by EyeSavant (725627) on Monday January 10, 2005 @09:59AM (#11309438)
        Yeah all you used to have to do is make a note in your accounts about the number of shares you have issued. I.e. do nothing.

        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.
        • Re:Eh. (Score:2, Interesting)

          by Anonymous Coward
          People have been warning anyone who would listen for several years, but most were on the take and their greed wouldn't let them see the true cost of this graft. Bill Parish, and accountant who first made public noise about this, and has been savaged by Microsoft's PR machine and sychophants every since, details the scam here:

          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:Eh. (Score:3, Interesting)

        by RetiredMidn (441788) *
        In the past, companies could issue stock options to employees essentially at no cost to themselves. This would tend to understate employment costs, making them look more profitable than they really were. In addition, the exercise of these options would dilute the value of the stock held by shareholders.

        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)

          by EyeSavant (725627) on Monday January 10, 2005 @11:06AM (#11309954)
          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 stock options

          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.
          • Case 3: Employee with stock option to buy shares at $200 a share. Employee does nothing with stock option as it will cause them to loose money.

            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.
          • My problem with your example is that, as I understand it, new shares are not magically created when options are granted, so there is no "invisible" dilution of value; shares are issued (if necessary) and set aside for options by a vote of the shareholders. This is a explicit "dilution" event no different (in its effect on current shareholders) from new shares issued to raise capital.

            So, unless I am wrong about my assumption that shares are only created and reserved for options explicitly by shareholder v

            • Your assumption is incorrect. A company can set aside shares when the options contract is written up, or buy shares off the market (shareholders) when the options are exercised, or print up new stock certificates at any time (called a split). The number of shares increases without changing the total amount of shareholders equity, effectively diluting the stock price. That's one of the reasons this is a difficult situation, because of the uncertainty. A company can take any of these actions, and the stock ma
          • Note that expenses related to profit/loss and stock dilution are seperate lines items in a companies shareholders reports.

            The exercise of a stock option is not a cash expense, but actually cash income, as the employee still needs to pay the company the strike price when exercising the options. Now the company does forego potential income by not selling its option stock at the market price; but reporting this loss of potential income as both an expense and as a stock dilution is double reporting the cost t
            • by ??? (35971)
              And what would you do with options that don't have a dilutive effect (those executed with treasury stock rather than issuing new stock for ex.)?
        • by johnnyb (4816)
          "Except that a stock option is not really a "cost"; it does not deplete the company's assets to issue them."

          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)

      by bulkmailforyou (847513) on Monday January 10, 2005 @09:46AM (#11309378)
      Bottom line is: all employess will get less stock options than before. Since they are now expensed, it affects the companies bottom line. Options will now be given less frequently, in smaller amounts or even no longer at all. This all depends on what the company wants, but this gives no reason to increase options.

      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.

      • Re:Eh. (Score:4, Informative)

        by jj_johny (626460) on Monday January 10, 2005 @10:13AM (#11309539)
        I really enjoy the folks out there that talk about the expensing as though its going to change everything. The reality was the stock options were used as employee comp but not counted as such. And I don't know of too many geeks who really understood the value of them when they got them. So when I got a boatload of options for joining a little company that was going to hit it big, I thought about it being a 10% bonus or something like that. It turned out that over the 5 1/2 years that I worked there I was paid (yes it said so on my W-2) 8 times more in exercised stock options than in my salary. (Granted my salary did not keep pace since I was in the money in my options.)

        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.

        • by oliphaunt (124016) on Monday January 10, 2005 @12:57PM (#11310862) Homepage
          The reality was the stock options were used as employee comp but not counted as such [...] 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.

          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...

          • 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

            This is good for entrepreneurs. They will have to think harder about what ideas they launch. No more lemonade stands on the internet, oops guess that ideas sucks. Oh well, I just burned through 10 million in VC dollars, but that's why it was a corporation, no personal liability.
            In this situation, the workers
      • Investors are affected, since over time the talent leaves a company and the company loses innovation and just maintains their current product.

        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
      • Investors are affected, since over time the talent leaves a company and the company loses innovation and just maintains their current product.

        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
      • by MrWa (144753)
        Take my post with a grain of salt - as you can tell I am against the practice.

        Why are you against the practice? What will entice employees to leave that would not have done so before?

        As an investor, this change is good - better than just ignoring the options all together.

        As employee, this change is good - less likely to get options that are underwater for years at a time.

        As an accountant, this change is a nightmare - how do you *really* value options??

    • Here you go: (Score:5, Insightful)

      by Proaxiom (544639) on Monday January 10, 2005 @09:53AM (#11309415)
      Faithful translation:
      [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...

      ...Financial statements that do not faithfully represent those economic transactions can distort the issuer's reported financial condition and results of operations...

      ...without showing up on the company's books, making them look a little rosier than they really are...

      ...which can lead to the inappropriate allocation of resources in the capital markets.

      ...thus inflating the stock price and ripping off investors.

      • Thank you. I wish I had mod points. (and the author of the summary should be shot.)
      • To be fair, they don't entirely rip off investors. The extra stock issuance ends up showing up on the companies per share data. Of course, you can argue that a lot of times, people aren't looking for the per share number - they are expecting a company to pull in a certain amount of revenue or profit, ignoring the new issuance that is being used as comp.

        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
  • by GigsVT (208848)
    Seems like it would affect investors that read financial statements more than geeks.

    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.
  • by NardofDoom (821951) on Monday January 10, 2005 @09:38AM (#11309329)
    Hell, I'd just like to be paid overtime.
    • by Anonymous Coward
      No pay, no work.

      If you're good enough, it'll work.

      • That's what I've been doing, precisely because I don't work overtime.
  • If they have to expense it anyway, just give us the straight stock. Then we can deal with less but still get a nice bonus and still gives us incentive for the company value to go up.

    Still, we now have less incentive to stay at the same place since we have a much smaller stake in the company. This can be a good thing or a bad thing.

    • IANAA

      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
    • Nah... companies will just continue to go with hard to take advantage of stock option plans.
  • Yes. I'll think about this issue when i stare at all the worthless options i got from companies that I worked for that are now no longer.

    Today when i negotiate w/ an employer i try to get a better deal for here and now rather than becoming a shareholder of the company. by the time you figure dilution and taxes, the company might as well just take everyone out for dinner and a movie and call it even.


  • > this will be a huge change in how tech companies work.

    Yeah, they won't be able to pay their slaves with a chance to sit at the roulette wheel once per job.

    • There is actually also another side to this
      story. I was working as a subcontractor to a
      large defense contractor (who shall remain
      unnamed). In the five years that I worked
      on that contract, my employer (who the defense
      contractor paid for my services) changed four
      times. One of the larger of my "new"
      employers offered me stock options after being
      there for 3 months -- the catch was that I had
      to exercise those options within 60 days. The
      strike price was, as I remember, about $25 per
      share. I decline
  • If stock options are accounted for as expenses, then they are less "attractive" as rewards for staff - prima facie.

    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.

    /joelethan

  • Mostly implemented (Score:3, Interesting)

    by confusion (14388) on Monday January 10, 2005 @09:46AM (#11309379) Homepage
    Most prudent CFO's have already implemented this. From what I have seen, stock options have been relegated back to start-ups, executive compensation packages, and in small amounts, performance & incentive bonuses for those who are the "top performers".

    Jerry
    http://www.syslog.org/ [syslog.org]

  • by Deal-a-Neil (166508) on Monday January 10, 2005 @09:47AM (#11309386) Homepage Journal
    This is important because companies that do not report this method of compensation (stock options) have inflated reported financials because options were not properly accounted for on the statements. So, what does that mean? Analysts and investors did not have full disclosure as to how future stock options being exercised would really affect the company in the long (or sometimes short) term.

    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.
    • by kevinT (14723)
      Because it means that MICROSOFT won't be as profitable as before.

      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.
    • On the other hand, this calls something an "expense" which isn't an expense except in a very abstract accounting sense, making earnings statements even more difficult to understand. Options are incentives which carry risk. This change undercuts their incentive value from the company's perspective, and ignores the risk (that if it really is an instrument in exchange for my services, then mostly I get screwed in that deal, based on our collective experience with options over the last ten years).
    • My company's been public for ~125 years, so there should have been enough information out there to value options using all the standard Black-Scholes models (except for that nasty telecomm industry crash that reduced them to wallpaper ;-)

      But most Silicon Valley stock options weren't that way - they were for pre-IPO companies developing The Next Cool Product, and valuing them for expense purposes was nearly impossible and certainly wildly inaccurate. If the product did in fact ship and turned out to be Th

  • by Anonymous Coward
    How about "Yes, this is a re-post from last week's news?"
  • by Anonymous Coward
    A stock option is a contract that lets you buy a share of stock after some point in the future at a specified price. Example, a Google employee might get paid an option to purchase Google at $50 / share exactly three years from today.

    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
    • 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?

    • A: My understanding of this is that in awarding options, the company sets aside the stock that covers the option when they decide to make the award. If this is correct, then the company would not be buying anything, they would be accepting they $50.00/share from the employee, and that would be a gain.

      B: "
      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
  • Dear Slashdot editors, I:

    [ ] don't get stock options
    [ ] don't work for a listed corporation
    [ ] don't work
    [ ] am not human

    YOU INSENSITIVE CLOD!

  • I read the FAQ link, The first few paragraphs essentially said, work for us, and we will pay you in lottery tickets.
  • Dupe! (Score:2, Informative)

    by yopie (470181)

    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)

    by devaldez (310051) <.devaldez. .at. .comcast.net.> on Monday January 10, 2005 @10:32AM (#11309687) Homepage Journal
    Couple of corrections to the statements already made:
    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)

      by ancientreader (256890)
      Options are a hedge only if you are exposed to a pre-existing risk to rises in the stock price. It's hard to argue that any employee is exposed to a risk based on the stock price *rising*.

      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
      • "Employees earn income from stock options; hence, the company should record expense".

        No company that I have ever had options in has ever gotten to the point where I could excersize. So, excepting the administrative costs, no expense happened for any of them in my case ( and in the cases of my fellow employees ).

        How do you account for that? I find it hard to believe that any company will say "well, success rates at startups are 1 in ten make it, so there is a 10% chance we will be standing in five years,
    • That's incorrect. All options have a value. Here are some examples. You'll notice that some options have close to zero value.

      http://finance.yahoo.com/q/op?s=GOOG
  • Double accounting (Score:4, Insightful)

    by bhurt (1081) on Monday January 10, 2005 @10:51AM (#11309836) Homepage
    This change will make stock options for anyone except the top most layers of management a thing of the past. You see, stock options are already expensed. The main measure of the value of a company is the Earnings Per Share, or EPS. This is the ratio of the total earnings of the company divided by the number of outstanding shares. Increase the number of shares, and what happens? The EPS drops. But now, if you issue stock options, you get hit twice. You get hit once by falling EPS due to the increased number of shares, and a second time as you have to decrease your earnings by an amount equal to the value of the stock option grant.

    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
    • 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

    • 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.

      This is what they wanted you to believe during the dot-com era. The purpose of stock option was, originally, to tie the financial benefits of top executives to the performance of the company. This idea was extended to other employees wh

      • You say "problem" when you talk about companies competing for employees. But isnt that just capitalism in action? I dont think it is truly a problem. It is inconvenient to the company that didnt get the employee, but I cant see that as a problem.
        • Problem only in the sense that the expense of compensating employees more and more via stock options was not being accounted properly. It isn't a problem that people were making more money.

          The competition will still be there now but in other forms.

    • OK, check it out - a company has earnings of 10mm/year, and 10mm shares, and 10mm in unexercised options. EPS = 1.00. Later, employees exercise, and EPS becomes 0.50. Now, granted once the employees exercise, the price is properly impacted... but beforehand, how would you know / predict? Outstanding shares don't include options (the shares come from the company's treasurey stock, I believe).
  • 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

    • The problem with the Black -Scholes [wikipedia.org] model for pricing options are the assumptions made by the model:
      • The price of the underlying instrument [wikipedia.org] is a geometric Brownian motion [wikipedia.org], in particular with constant drift and volatility.
      • It is possible to short sell [wikipedia.org] the underlying stock.
      • There are no riskless arbitrage [wikipedia.org] opportunities.
      • Trading in the stock is continuous.
      • There are no transaction costs.
      • All securities are perfectly divisible (e.g. it is possible to buy 1/100th of a share).
      • The risk free interest rate [wikipedia.org] is con
    • An ESOP (employee stock option plan) is a radically different animal than the options that are traded at the CBOE and you can get quoted on Yahoo Finance.

      The ESOP (or ISO, incentive stock option) is not a liquid security for one (i.e. you can't just call up Schwab and sell them your options). Black-Scholes is designed to model a freely traded derivative type of option, so a lot of the parameters that go into the model are going to be fudge-factor-central when the thing you are trying to model doesn't real
  • Speaking from personal experience, options are great when the stock market is on a tear and an insult when the markets are going down. For the past four years, I'd take salary and a steady pay check over options any day. And the sickening thing is that although options are touted as a way to give everyone at a company a share in the company, it's by no means an equal share. The disgusting disparities in pay are echoed even more ridiculously in terms of options.
  • The problem that I have with all this is the word "expensing". An expense is something that HAS cost you money. A liability is something that WILL cost you money. These don't cost the company one cent until they're cashed in, and might not ever if they're given out at the top of a bubble. They're liabilities, dammit!
  • I have stock options that have vested that I can't exersize because the bottom fell out (i.e. lets say I got options at $20, and now the stock is selling for $10).

    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
  • Basically reporting will be better, but it will mean a big change in the tech industry for talent. If the company's response to this is to stop issuing stock options then they need another way to incentivize (is that even a word?) their employees. If they decide not to then they will be basically creating a salary cut of some sort.

    In other words give me options or give me money, but if it's just salary and the salary only grows by 2-3%/yr then I will change jobs more often than before since that will be
  • I've got a corporation. I'll just issue more options on shares, and give them to my employees instead of cash - up to 25% their salaries, a great value for them, at the rate I'm offering. I'll convert 25% of my biggest expense, salaries, from cash I have to get from customers, into options I can whip up in an email, and keep that 25% as profit. Until they exercise those options (I dunno, after the IPO, I guess), that profit is all mine. With every other corporation printing up money in the form of these exp
  • ... about technological lingo.

    Now I have a shinny example of obfuscated English language from another field of human knowledge.

    Well, I am guessing some knowledge is contained in the intro, because frankly I have fuck idea what they are talking about.
  • Companies shouldn't be allowed to expensive giving an "option" to an employee. At best they should be able to expensive it ONLY when the employee excercises that option. When a company gives an employee an option to something that the employee may not want nor ever use, the company is getting a dumping ground write-off where as the employee STILL has to expend money AND pay taxes on the speculative venture.

    The only thing that businesses should have the ability to write off is actual tangible stock grants -
  • I have previously ranted [slashdot.org] about the valuation of these options here on Slashdot. I realize that such is not in the Slashdot tradition, but rather than continuing to just rant, I actually spent some time this weekend to do something about the problem.

    Since I am a quant, I created a model [boonstra.org] (released at my public website under the GPL) for pricing employee stock options properly. Or at least more properly than people are doing right now. Much as I dislike working in Excel and VB, I decided they were the way

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