After all the phony baloney of the recent past, a requirement that companies report real numbers doesn't sound particularly onerous.
No sooner did FASB weigh into the debate last March then opponents dunned its proposal as truly evil stuff, if not downright un-American. It was an example of bad thinking by tax-and-spend Beltway types that would only harm working families. Even worse, they argued, it would wreck productivity and rob companies of the incentive they need to continue to innovate.
The hardball approach worked. When I spoke with TechNet CEO Rick White a day after the vote, he was still ebullient about the one-sided magnitude of the 312-111 vote.
"We were really pleased," said White, a former congressman who also serves as chairman of the International Employee Stock Options Coalition. "(The numbers) definitely exceeded our expectations."
TechNet, which serves as the political voice of the technology industry, lauded the House vote for preserving employee stock options for rank-and-file workers. But what he couldn't explain was how the FASB proposal would drown the very spark of Yankee ingenuity.
So it goes in a republic, majority rule and all that, but did the majority get hoodwinked by the minority--and a very self-interested one, at that? FASB never called for the elimination of stock options. Not even close.
Radical types like Federal Reserve Board Chairman Alan Greenspan and Berkshire Hathaway CEO Warren Buffett are on record saying expensing options is a sensible idea. Now go try convincing the barons of Silicon Valley.
The tech industry, slowly clawing its way back after three years of post-bubble misery, does not want to rock the boat and possibly derail chances for a full-fledged recovery. That's a reasonable concern, but after all the phony baloney of the recent past, a requirement that companies report real numbers doesn't sound particularly onerous. You'd never think that by just listening to the rhetoric. Folks who stand to benefit mightily by maintaining the status quo spun this as a victory for the little guy.
Rep. David Dreier, R-Calif., dismissed the notion of stock options being an expense as "absurd," declaring that options align the employee interest with the company interest. That sounds a lot more palatable than saying he wants to help the rich get richer. (I'm sure it's entirely coincidental, but the American Electronics Association, the nation's largest high-tech trade association, inducted Dreier into its "High Tech Legislator Hall of Fame." The Business Software Alliance awarded him its "Cyber-Champion" title in 1999, and in 2000, Dreier was named "High-Tech Legislator of the Year" by the Information Technology Industry Council.)
I'll avoid taking the mandatory cheap shot by pointing out that Dreier hails from the same governmental body that brought us the genius "freedom fries." (Ah, I couldn't resist.)
The House vote isn't the last word on the subject. A bipartisan group of senators is pushing a measure urging the body not to undercut FASB's authority by following the House vote. Maybe I'm just too old-school, but I still have faith that wiser heads of government will win out in the end.
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Charles Cooper is CNET News.com's executive editor of commentary.
options needs to be disclosed and accounted for, but I've never
seen an explanation of how expensing them is a meaningful way
to address this.
Take a typical (hypothetical) situation where an employee is
granted options on ten thousand shares at $15 per share. Some
press reports describe this a $150,000 in options, implying that
it should be a $150,000 expense. In fact, no value has yet
changed hands, and the options are worthless until and unless
the price of the stock goes up (which doesn't always happen, as I
know from disappointing experience).
If the stock price does go up (to $20 per share, for example),
$150,000 is the amount of money the employee has to PAY (to
the company) to acquire the stock; if sold immediately, the profit
is $50,000. A nice windfall, but not $150,000.
If, on the other hand, the options remain "underwater" (i.e., the
stock price remains below $15), they are worthless, and the
shares never change hands. What, then, is the expense to the
company?
Shareholders are not without disclosure under current practices.
As I understand it, shares are made available for option plans by
a vote of the shareholders, and granting of options are notes
(albeit in footnotes) in company reports. Maybe there's a better
way to disclose shareholder exposure, but I've never seen an
explanation of how the "expense" can be accurately quantified at
the time the options are granted.
Hence it is an expense.
Also the large portion of the company that is owned by the employees through stock options represents a rather large chunk of the companies assets that can be liquidated and lost without warning.
Its not fair to the public stockholders when a company suddenly incurs millions of dollars in expense because someone cashed in their options or when in a few days time the company goes from profitable to bankrupt because multiple people cashed in their options and left.
Listing it as an expense from the start makes the company seem slightly less profitable on paper because currently they dont have to list company assets that no longer belong to the company as expenses when it comes to stock options, artificially and incorrectly inflating the companys capital (its borderline fraud).
However, expensing the options is benificial to the company at the same time because it gives them a more realistic view of what they own and have to work with. If the employee returns the stocks to the company then the company benefits and is made to look good from the rise in capital but if the employee cashes in the stocks it still doesnt reflect badly on the company because those stocks were expensed long ago and has no effect at all on the bottom line.
It would also curtail the bad habit of CEOs of tech companies of handing out large portions of the company through stock options without regard for how it will eventually effect the company as a whole. In the short term it seems like a good way to keep good employees, a bonus that doesnt cost the company anything.. until the options are cashed in then the company is hit hard.
These regulations arent about making a company look bad and stifling innovation its about making companies be honest about where they stand financially to the real people that own the company.. the shareholders.
To the little man who wrote this fairytale: my company told me that they would cancel stock options all together if the government gave them more red-tape and buracracy. So, I'm gladly KEEPING my stock options, thanks to this vote.
Oh, yeah, and how do you value an option again? Anything you put down is just a guess. So the socialists have answered that with "well, you need to revise that guess constantly and the moving average will show the way". Thats great, but do you have ANY CONCEPT of the paperwork and man hours a task like that generates? No, because you are not a business man. You are a socialist.
Luckily, close-minded people like yourself are currently out of power. Hence the 300-100 "slam-dunk". Keep dissing America and the right to amass wealth and hopefully you will stay out of power for a very, very, long time.
Cheers, to a new millenium!
The only one here acting like a hater is you. You look really low-brow defending a president who has shares in Arabic oil companies and the military power to defend those interests.
Calling people names the moment they want to change any legislation that could lessen your profit even the slightest looks supremely neanderthal. But at least you're rich, right?
This approach may have impressed Attila the Hun but it will not influence any rational mind, regardless of politics.
- Expensing options would decrease usefulness of financial statements
- by Maddog27 July 28, 2004 8:00 AM PDT
- Obviously the author is making a political statement and not looking at the accounting issues. By expensing options, management would have to set the value of the options given. Their is no good way to value those options. Black Scholes is used but even the best academics will tell you that when the stock has high variability the model begins to break down.
- Like this Reply to this comment
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(8 Comments)Expensing options doe not fix the problem. Oversight by a responsible board is what is needed not increased regulation.