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The Coming Expensing of Employee Stock Options

Hemos posted more than 9 years ago | from the big-changes-coming-down dept.

Businesses 222

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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222 comments

Stock options? (5, Informative)

Dancin_Santa (265275) | more than 9 years ago | (#11309302)

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? (3, Interesting)

eyeball (17206) | more than 9 years ago | (#11309404)

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.

Re:Stock options? (1)

stinerman (812158) | more than 9 years ago | (#11309857)

Smart money is on "screw-job".

Re:Stock options? (0)

Anonymous Coward | more than 9 years ago | (#11309858)

This year they won't, but it remains to be seen if we'll get cash, straight-out stock, or a
screw-job.
Reallly? I didn't know it was legal to offer such things. What a great present to lonely, sex-starved geeks! How can I join your firm?

Re:Stock options? (1)

Peldor (639336) | more than 9 years ago | (#11309921)

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.

Can I put $10 on the screw-job?

Re:Stock options? (1)

StillNeedMoreCoffee (123989) | more than 9 years ago | (#11310181)

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 month later for the same position I get particularly pissed. Thats what happened to my wife and her job.

It may be time to level the playing field in those situations.

As to the dot com's there with all employees sharing it did include everyone in the enterprise and brought a smile to my face to see (my wifes previous job, but they ended the ESOP 6mo. after she joined).

So as a tool to include all the employees in the enterprise, these new rule will ruin that. But will fix another problem with management/executive compensation way out of line with value added.

Politics? (1)

Uber Banker (655221) | more than 9 years ago | (#11309498)

Why Politics? This is not a political issue.

Re:Politics? (1)

Cocteaustin (702468) | more than 9 years ago | (#11310262)

It absolutely is a political issue, since the decision to expense or not to expense was 1) made by the government, and 2) came about as a result of public outcry over the stunning lapses in corporate governance that occurred over the last few years (Enron, Tyco, etc.). The expensing rule was implementated for reasons of transparency and fairness to investors. But that transparency was already there (since corporations already have to disclose how many shares of stock they issue and to whom). As for fairness to investors, when was the last time you did or did not purchase a company's stock based on how many options it issued to its employees? Didn't think so.

lame ones on the board (0)

Anonymous Coward | more than 9 years ago | (#11310197)

This http://finance.yahoo.com/q/bc?t=5y&s=ORCL&l=on&z=l &q=l&c=ca%2Cbmc%2Cmsft shows that companies heavily into issuing stock opttions have gone down 50% over the last 5 years.

The 'the economy is against us' in their financial statements does not stand.

Eh. (3, Insightful)

Anonymous Coward | more than 9 years ago | (#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?

Get a dictionary (-1, Troll)

Anonymous Coward | more than 9 years ago | (#11309315)

Yes, we know a kindergartener can't read it, but what is your excuse? I think your mommy should take away your PC and give you a "Leapfrog".

Re:Get a dictionary (-1, Offtopic)

the_mad_poster (640772) | more than 9 years ago | (#11309371)

Sir, kindly note that I was a relatively fluent reader in Kindygardon. Which means, I think you just insulted yourself.

Re:Get a dictionary (1)

randallpowell (842587) | more than 9 years ago | (#11309390)

Since when is it a crime not to be fluent in business. Oh yeah, 2000.....

Re:Eh. (4, Informative)

acvh (120205) | more than 9 years ago | (#11309376)

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. (5, Informative)

EyeSavant (725627) | more than 9 years ago | (#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. (2, Interesting)

Anonymous Coward | more than 9 years ago | (#11310301)

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 aggressively markets stock options to new employees in an effort to take wage expenses off the books. They also know that they can pocket the exercise price employees will be required to pay to take ownership of the stock. What also seems clear is that Microsoft is still aggressively marketing its stock option program to new recruits. To quote an email received, "I am about to begin employment at Microsoft and the stock option was the selling factor. Does your article overall state that it will be bad for me and will fail me in my retirement planning?" Is Microsoft fulfilling its disclosure obligations to its own employees, especially those that have put their entire 401K balance in Microsoft stock? This explains how 22 percent of Microsoft's massive cash balance has actually come from its own employees in the form of them prepaying their own wages through stock option exercise prices."

This is only one aspect of the total scam which that article details.

Re:Eh. (-1, Troll)

Anonymous Coward | more than 9 years ago | (#11309476)

There goes amazon.com..

They issued options to everyone and their dog!!

Even those who got sacked during the 2000 disaster had to keep their options ebcause their contract forbade them of selling / exercising within a number of years of issuance.. funny because that clause was supposed to engender staff loyalty!! Har Har!!

Re:Eh. (2, Interesting)

RetiredMidn (441788) | more than 9 years ago | (#11309744)

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 stock options, and, as I understand it, this is something the shareholders have to explicitly approve and is therefore duly noted in the company's financial records.

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.

My only problem with this is that, as the FAQ points out, there is not really an exact equivalent available to the general investor. Which means the calculation of the "value" of an option is something of a fiction, which is not accounting as I thought I understood it (and I never thought I did...).

I would have considered it more accurate to regulate how shares that are set aside for options are accounted for. If I'm worried about options, I would be able to figure out how vulnerable the stock price is to sudden shifts in ownership due to option exercises, just like I can figure that out based on company reporting of large blocks of outright ownership.

Re:Eh. (4, Informative)

EyeSavant (725627) | more than 9 years ago | (#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.

Re:Eh. (1)

ancientreader (256890) | more than 9 years ago | (#11310369)

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... First of all, many companies buy back their shares (at market prices) to then reissue when employees use the options. This costs the company real money. Second, the company loses out on taking in cash by accepting a discounted purchase price instead of market value when employees use the options. Cash is most definitely "depleted" here.

But some values are fairer than others (1)

m0llusk (789903) | more than 9 years ago | (#11309785)

Enjoy this choice bit from the FAQ:
The Statement permits entities to use any option-pricing model that meets the fair value objective in the Statement; however, the Baord believes that lattice models, including the binomial option-pricing model, are capable of more fully reflecting certain characteristics of employee share options.

If you do not know what lattice models and binomial option-pricing models are and how they work, then do you really understand what this change represents? Mandelbrot's new book The (Mis)behavior of Markets has some interesting arguments that these models are poor representations of value based on misunderstandings of how markets determine prices. This is somewhat damning, especially if the problem this is supposed to solve is corporate executives feathering their nests to extremes which is still continuing and increasing.

Re:Eh. (4, Informative)

bulkmailforyou (847513) | more than 9 years ago | (#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. (3, Informative)

jj_johny (626460) | more than 9 years ago | (#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.

Re:Eh. (1)

R2.0 (532027) | more than 9 years ago | (#11309559)

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

Where will the "talent" go - to another company? They won't be giving any better deals.

As for investors, they get an instant benefit - the stock they hold or will buy more accurately reflects the value of the company.

Ah. (0)

Anonymous Coward | more than 9 years ago | (#11309694)

Nice catch on the inherent logical fallacies in the parent post, and the nod towards the rules making the market more efficient by increasing the amount of signal reflected in the market price.

Re:Eh. (0)

Anonymous Coward | more than 9 years ago | (#11310339)

True they might not get a better deal at another company, but they won't be getting a worse deal, but get to work on something new and interesting. I thought the idea was to keep people from bouncing from one company to the next since a lot is invested in training a replacement and not losing knowledge.

Re:Eh. (1)

TheGratefulNet (143330) | more than 9 years ago | (#11310311)

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. we already can't compete for jobs on our own homeland anymore; why should we be surprised that no more stock options come our way?

/welcome to the disenfranchisement of the american worker

Here you go: (4, Insightful)

Proaxiom (544639) | more than 9 years ago | (#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.

Re:Here you go: (1)

Vo0k (760020) | more than 9 years ago | (#11309440)

Thank you. I wish I had mod points. (and the author of the summary should be shot.)

Re:Here you go: (1)

Bellyflop (681305) | more than 9 years ago | (#11309693)

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 compensate you in cash or stock awards, all the better. I'd rather be able to diversify my portfolio rather than have it all tied up in one company whose honesty and management I can't necesarily gauge. All it takes is one accounting scandal to wipe out your personal profits.

Re:Here you go: (1)

Mandrake.Eldorage (720276) | more than 9 years ago | (#11310077)

Stock options amount to the company giving money to employees...
No, stock options amount to the shareholders giving money to employees.
...without showing up on the company's books,
Because they don't affect the company's books. They affect the value of the shares.
...thus inflating the stock price and ripping off investors.
When an employee exercises stock options (sells them on the market), the number of shares outstanding is increased, thus diluting the value of all shares slightly. The seller gets money from this dilution. It could be seen as a ripoff, but only if the shareholders are naive enough to not know what is happening. All the information required to see this is present in the company reports, before or after the FASB rulings.

Re:Here you go: (1)

Proaxiom (544639) | more than 9 years ago | (#11310195)

Indeed, I was only presenting one side of the argument, which is what the article summary contained.

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 mandatory, because stock dilution affects share price in exactly the same way that expenses do. It is not simply naive shareholders who are affected, but any shareholder who does not know how to look at the option grant numbers and calculate a reasonable valuation for them (which is probably all investors excluding investment professionals and accountants).

Re:Eh. (-1)

Anonymous Coward | more than 9 years ago | (#11309608)

I love how standing up and proclaiming ones own ignorance or stupidity is judged to be "insightful" here on Slashdot.

Re:Eh. (0)

Anonymous Coward | more than 9 years ago | (#11309643)

If the summary had been written in a way that was meaningful to EVERYONE not just someone with experience in financial matters, the aforementioned post would not have been needed.

You know there was a time when asking for an explination on Slashdot did not open ones self to bashing by anyone who deemed themself wiser than the poster.

Re:Eh. (-1)

Anonymous Coward | more than 9 years ago | (#11309784)

You know there was a time when asking for an explination on Slashdot did not open ones self to bashing by anyone who deemed themself wiser than the poster.
No there was not.

Re:Eh. (1)

packrat0x (798359) | more than 9 years ago | (#11309662)

"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.

"Investors" say the old method does not accurately show the cost of employee pay and benfits.

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."


Inaccurate financial statements are bad. Investors may put money into cruddy companies.

Isn't this... (0)

Xuranova (160813) | more than 9 years ago | (#11309308)

old news? "Oh god we can't inflate our earnings anymore." It'll be ok guys, just calm down with the options a bit...

Get it now (0)

ciscoeng (411359) | more than 9 years ago | (#11309311)

All Slashdotters who post before 10 a.m. get non-qualified stock options. Get a piece of blank paper, write a number on it, and there you go.

OK, now lets try that in English please... (-1)

Anonymous Coward | more than 9 years ago | (#11309317)

Some of us don't have Finance degrees.

16th month? (-1)

Anonymous Coward | more than 9 years ago | (#11309321)

There's no 16th month. 12/16/04 makes no sense. What are you talking about?

Re:16th month? (1, Informative)

Anonymous Coward | more than 9 years ago | (#11309346)

FASB is located in the USA.

In the USA, it's Month/Day/Year.

Of course, you knew that, you're just trying to be funny (and failing miserably.)

Re:16th month? (2, Insightful)

Anonymous Coward | more than 9 years ago | (#11309453)

Nah, not funny. Bitter and cynical.

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.

Re:16th month? (0)

Anonymous Coward | more than 9 years ago | (#11309691)

Yeah, ISO finally defines Monday as the first day of the week. If Sunday is part of the *weekend*, how could it ever be the *first* day of the week?

Re:16th month? (0)

Anonymous Coward | more than 9 years ago | (#11310207)

So if there is no universally accepted method, how could one use be wrong and another right? How in the future is someone going to suddenly realize the method they use is screwed up and what is going to trigger that sudden thought? Both methods represent the date, neither is better then the other. 99.99% of the people I deal with on a daily basis use the same method I do, I am not switching until the majority swings the other way. There is a long way to go for that and if it does happen, It will not be because I suddenly realized the previous method was stupid.

Re:16th month? (0)

Anonymous Coward | more than 9 years ago | (#11310353)

Oh ye of limited thought! Clearly there are only two possible sensible methods: left to right, or right to left. Putting the middle bit first is just plain wrong.

But never mind this, I'm willing to give up my native date ordering to adopt the ISO standard. This should make you happy as I don't get to win either. We would meet at a neutral point, so to speak, where neither the European nor the American format win, though the Japanese might feel a bit smug.

Huh? (1)

GigsVT (208848) | more than 9 years ago | (#11309327)

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.

Re:Huh? (1)

GigsVT (208848) | more than 9 years ago | (#11309342)

The article seems to imply that

I meant the slashdot blurb, of course. The article is fine.

Who Gets Stock Options? (4, Insightful)

NardofDoom (821951) | more than 9 years ago | (#11309329)

Hell, I'd just like to be paid overtime.

Just work a 40-hour week (2, Insightful)

Anonymous Coward | more than 9 years ago | (#11309370)

No pay, no work.

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

Re:Just work a 40-hour week (1)

NardofDoom (821951) | more than 9 years ago | (#11309456)

That's what I've been doing, precisely because I don't work overtime.

Re:Just work a 40-hour week (0)

Anonymous Coward | more than 9 years ago | (#11310185)

ermm....

I had a former cow-orker who used a variation of that argument -- "if they're only going to pay me $50K, then they'll only get $50K-worth of work out of me" -- (numbers not actual).

Note the word former -- this is a path that is not without risk. Of course, you should take a moral stand, but do your homework first (have a place to stay when you're out of work, have the surgery done before you take the mighty stand...).

Forget the option just give us the stock (1)

bulkmailforyou (847513) | more than 9 years ago | (#11309331)

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.

Re:Forget the option just give us the stock (1)

DrSkwid (118965) | more than 9 years ago | (#11309437)

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 work then you could pay less income tax as the value of the sale will be offset by the tax threshold. (£4500 atm. iirc)

Re:Forget the option just give us the stock (1)

Uber Banker (655221) | more than 9 years ago | (#11309545)

That is the tax treatment to the individual in the UK, which while important in the cash vs. options decision, is irrelevant r.e. the article, which is about how companies have to account for options on their income statements and balance sheet.

Re:Forget the option just give us the stock (1)

DrSkwid (118965) | more than 9 years ago | (#11309817)


The post to which I was replying asked "If they have to expense it anyway, just give us the straight stock."

As options and not stock the receiver can decide when to incur the tax implications.

Re:Forget the option just give us the stock (1)

stupidfoo (836212) | more than 9 years ago | (#11309444)

Nah... companies will just continue to go with hard to take advantage of stock option plans.

Re:Forget the option just give us the stock (1)

Momoru (837801) | more than 9 years ago | (#11309733)

Giving the stock would result in even larger losses for the company as this would either require the issuance of new stock (diluting the existing stock) or the company buying stock off the open market. The way options work is that I'm given an option to buy the stock from the company at a "locked in" price for a certain amount of time. This is nice because as an executive, I can wait to exercise my options only when i'm guaranteed a fat profit. If i'm forced to buy the stock outright i may incur losses.

Re:Forget the option just give us the stock (1)

Kevin Stevens (227724) | more than 9 years ago | (#11310033)

I think it is important for you to realize that granting options DOES dilute the existing stock.

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 usually holds lots of stock options, and not actual stock, it is therefore in their best interests to reinvest any additional profits back into the company, not to dole out dividends to actual stock holders).

grab what you can NOW (1)

TTL0 (546351) | more than 9 years ago | (#11309334)

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.

Re:grab what you can NOW (1)

Daengbo (523424) | more than 9 years ago | (#11309511)

Yeah, but if you get dinner and a movie from them, you know they'll be expecting something from you after... ;)

Re:grab what you can NOW (0)

EvilArchitect (515225) | more than 9 years ago | (#11309739)

Wow! You get a MOVIE?!?

Huge change... (0)

Black Parrot (19622) | more than 9 years ago | (#11309350)


> 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.

Re:Huge change... (0)

Anonymous Coward | more than 9 years ago | (#11310142)

> > > 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.

I'd rather work like a slave with a spin of the roulette wheel per job, than work like a slave without the roulette wheel.

All this FASB change means is that the only people who will ever make it big are the ones in senior management (for whom it's "worth it" to the decisionmakers on the board to take the $1M expense to grant them the options). Joe Coders like you and I are fucked.

Does it mean LESS stock options, or not? (2, Interesting)

joelethan (782993) | more than 9 years ago | (#11309373)

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
-- In Sri Lanka they aren't worrying about their STOCK OPTIONS being underwater. --

Re:Does it mean LESS stock options, or not? (1)

biggerboy (512438) | more than 9 years ago | (#11309721)

More likely both, depending on the situation.

The people hurt the most by this change are the middle mangers and below. The executives will continue to get stock options while everyone else does not.

As for people who think that stock options are ways of "lying" to investors, the problem is that there really isn't a way to expense them in a way that 100% of the people out there agree out there.

I personally think the formula they're using isn't correct, because it's designed for options trading, whose value varies from day-to-day. For companies that expense options at a higher rate, and then their stock goes down, do they get bonus revenue? Nope.

That's why this is so fool-hardy. Reminds me of the Heisenberg Uncertainty Principle (I'm sure I misspelled that :-) It's too early in the morning)

Re:Does it mean LESS stock options, or not? (1)

joelethan (782993) | more than 9 years ago | (#11309855)

Agreed: executives will continue to get stock options - they like it that way. Also, as you say, the value (expense) of stock options is slippery at best. If the company fails to perform they expense at zero, otherwise they are a real expense. I'm glad my tax isn't worked out like this.

Another aspect of stock options is that companies need to buy stock to feed the schemes which may well inflate share price.

/JE

Mostly implemented (2, Interesting)

confusion (14388) | more than 9 years ago | (#11309379)

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]

Re:Mostly implemented (1)

Cocteaustin (702468) | more than 9 years ago | (#11310310)

It isn't the case that "most" companies have done this. Some have.

MY HAMSTER ATE MY SUB (-1, Offtopic)

Anonymous Coward | more than 9 years ago | (#11309385)

He just squeezed it all in his cheeks

Why this is important.. (4, Insightful)

Deal-a-Neil (166508) | more than 9 years ago | (#11309386)

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.

Re:Why this is important.. (2, Interesting)

kevinT (14723) | more than 9 years ago | (#11309428)

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.

Re:Why this is important.. (1)

Cocteaustin (702468) | more than 9 years ago | (#11310338)

Um, no, because Microsoft stopped giving out stock options to rank-and-file employees in the last year and a half. (They now give grants of stock instead, which are always expensed.)

Re:Why this is important.. (2, Interesting)

NotWallaceStevens (701541) | more than 9 years ago | (#11309445)

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).

"Yes; the data is from 12/16/04" (2, Funny)

Anonymous Coward | more than 9 years ago | (#11309387)

How about "Yes, this is a re-post from last week's news?"

Stock Option for Dummies (2, Informative)

Anonymous Coward | more than 9 years ago | (#11309389)

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 classified as income from continueing operations .... very misleading.

Also misleading is that a company can employ a bunch of people without incurring the usual payroll costs associated with employing people. Therefore, sales should rise, but costs of goods sold does not rise. This creates a misleading impression of profitability. However, the market will probably catch this and lower the value of the stock. And this can happen long before your option has reached its maturity.

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.

Going back to the Google example, if three years from now Google traded at or below $50 / share, your option would be worthless and you would have nothing. That is why you might want to consider getting paid in cash VS. getting paid in options.

Re:Stock Option for Dummies (1)

adsl (595429) | more than 9 years ago | (#11309945)

However, IF the Google employee is allowed to make a Sale of his stock on the Open market, at the then maket price of $100.00, the following happens. The employee makes a gain of $50.00 per share and he has to pay Tax on that gain. Google receives new Capital at $50.00 per Share (i.e. at the original strake price and not the now market price). (Note all options come from "authorized" shares to be issued as approved by their Board of Directors and noted in all financial statements and voted on by existing Shareholders). In this example Google has not Loss. It merely finally receives cash capital at the rate it agreed to 3 years ago. Why then push through a financial loss to the company when it has suffered no loss!

Re:Stock Option for Dummies (1)

Herbmaster (1486) | more than 9 years ago | (#11310189)

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?

Look up "SAR" - stock appreciation rights (0)

Anonymous Coward | more than 9 years ago | (#11310224)

Many companies allow you to receive cash instead of company stock. That is called a Stock Appreciation Right (SAR). Usually this information is contained in the annual report.

To save time, a little proforma (1)

Zog The Undeniable (632031) | more than 9 years ago | (#11309408)

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!

Not even a month ago.... (-1)

Anonymous Coward | more than 9 years ago | (#11309439)

http://it.slashdot.org/article.pl?sid=04/12/17/149 238&from=rss

Huh? (-1, Redundant)

Lord_Dweomer (648696) | more than 9 years ago | (#11309452)

Plain english translation please?

Lottery (1)

ryu1232 (792127) | more than 9 years ago | (#11309486)

I read the FAQ link, The first few paragraphs essentially said, work for us, and we will pay you in lottery tickets.

Re:Lottery (0)

Anonymous Coward | more than 9 years ago | (#11309908)

I read the FAQ link, The first few paragraphs essentially said, work for us, and we will pay you in lottery tickets.

Right, but in this case, it's like the lottery company paying its employees in lottery tickets, but not calling it an expense (or only expensing the cost of the paper for the ticket). The problem is that the stock option or lottery ticket has some value that the company is not considering.

Remember that an option is not stock - it's an option to buy stock later at a given price today. Say a company gives an employee options to buy 10 shares at $10 each. Say there are already 10 shares outstanding. If the employee takes the option later when the stock price is twice as much as the option price (so price is $20 per share, or owner's equity of the company is $200), then the company gets $100 more cash from the employee, so it's worth $300, but there are 20 shares now, so the share price drops to $15 each. That means unexercised options need to be taken into account to give a real financial picture. (This is all over-simplified and doesn't take future earnings of the company into account).

Every time the company publishes its financial statements, it needs to include the effect of exercising all of the options that are out there.

Microsoft (0)

Anonymous Coward | more than 9 years ago | (#11309502)

Yay! Microsoft can no longer grow like a pyramid scheme, w00t!

Get a job at microsoft, get all these options Microsoft gets bigger cause they hired you, & their stock goes up. Microsoft hires more people using extra stock money...give out options...w00t pyramid scheme!

Why is this in the Politics section? (1)

R2.0 (532027) | more than 9 years ago | (#11309512)

I guess Politics is becoming the new catch all, after YRO.

Negative side of stock options (1)

childv (841999) | more than 9 years ago | (#11309586)

Working for two start-up companies (now defunct). I had stock options - now worthless. What these options meant to the technical staff? A way (good and bad) for the management staff to motivate the already overworked technical person. That is not to say that options used for motivation were bad. Having stock options did help form a comradely in the technical organization. But now looking back - after all the long hours working hard to make the new company successful with the thought in the back of your mind that you would receive a reward in the end - is a very poor way to motivate yourself.

mod parent up (-1)

Anonymous Coward | more than 9 years ago | (#11309723)

nuggets of wisdom

Dupe! (2, Informative)

yopie (470181) | more than 9 years ago | (#11309673)

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... (3, Interesting)

devaldez (310051) | more than 9 years ago | (#11309687)

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... (2, Informative)

ancientreader (256890) | more than 9 years ago | (#11309842)

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 expense based on changes in expected redemption rates due to the factors you list (employee attrition or stock price behavior).

Accounting records anything with cash implications to companies. Options have such implications, and the presentation in income underscores this.

Fewer Startups (0)

Anonymous Coward | more than 9 years ago | (#11309699)

In the past, startup tech companies have relied on stock options as an affordable way of attracting qualified employees. With option expensing these startup's ledgers will be so ugly that they will no longer be able to attract venture capital. So startups will be forced to either

1. Not offer options, and have a harder time attracting the high powered engineers.

2. Offer options but run with no operating cash because they can't get venture capital.

3. (The most likely) Simply never start the company in the first place.

The bottom line for us techies should be fewer startups and fewer jobs.

Re:Fewer Startups (0)

Anonymous Coward | more than 9 years ago | (#11309796)

You forgot:

4. Start a company that's profitable without needing to lie to investors.

The bottom line is that there should be fewer failed startups.

Stock options are not random (0)

Anonymous Coward | more than 9 years ago | (#11309705)

Everyone keeps talking about how the payoff from stock options are random. This is not the case. Stock options pay off when the company does well, they do not pay off if the company does poorly.

The whole point of stock option is to align the interests of the employee with the interests of the owners (shareholders). This is most important with upper management because the decisions they make affect the value of the company more heavily then the decisions lower down in the company.

Double accounting (3, Insightful)

bhurt (1081) | more than 9 years ago | (#11309836)

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

Ho hum... maybe. (1)

Anonymous Meoward (665631) | more than 9 years ago | (#11309846)

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 act responsibly before diluting their owners' equity. There's no need anymore to tolerate any of the "license to print money" crap from the past decade.

The only bone I have to pick is that, IIRC, someone out there (FASB? SEC? your congresscritter?) is thinking of abandoning the Black-Scholes method of options pricing, which is the standard method (look it up), but only in the case of executive or employee compensation.

That sounds fishy to me: IMO an option is an option is an option, and should be evaluated as such. Any other finance/econ dilletantes out there care to comment?

Fine with me (1)

YllabianBitPipe (647462) | more than 9 years ago | (#11309885)

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.

But they're not "expenses"! (1)

Megane (129182) | more than 9 years ago | (#11309976)

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!

Re:But they're not "expenses"! (1)

ancientreader (256890) | more than 9 years ago | (#11310145)

Not quite. An expense is something that has or will cost money, either based on a past action or an action you take now that impacts cash in the future. It's not a liability because it deals with a company's own stock, which is an equity transaction and not a liability. (Imagine if companies could play with their balance sheets just by trading in their own stock...accounting rules don't let them do this, in the main.)

Options are an expense - the company's taken an action that comes with a (likely) future cash sacrifice, but a sacrifice of future cash financing.

Stock Options are not a panacea... (1)

Lodragandraoidh (639696) | more than 9 years ago | (#11309994)

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 given in recent years - when the stock price was inflated. There is a time limit on how long you can hold them once they vest - so having stock options is a big gamble for you)

Closing the Doors, One By One (1, Informative)

Anonymous Coward | more than 9 years ago | (#11310209)

This is nothing new. Before the 1970's, when only cash income was taxed, companies used to provide benefits like country club memberships, cars and drivers, free homes, etc. instead of salary. This was especially prevalent in Britain, where the marginal tax rate pre-Margaret Thatcher reached 83%(!). It was cheaper to give the employee a house and a car and pay a low-salary chauffeur than to give the manager a raise that gave him $10,000 more take-home pay. Make all remuneration the same, and let the employee decide if they want the money or the car...

Similarly for corporations. If payment A (cash) looks like an expense on the balance sheet and payment B (options) doesn't (yet), then which one will they pick?

I guess one of the other questions is, how does the company handle options when due? If they just issue new shares, they dilute existing shareholder value - which those shareholders might want to know about. If they buy back shares the company incurrs an expense which should be noted. Issuing shares is the least painful method to the bottom line, if the excutives are no longer majority shareholders, and the existing shareholders have little clout.

The Accounting profession (IANAA) is generally conservative. Income should not be recorded until it's earned, expenses should be recorded as soon as you're contractually obligated to pay. (I.e., you can't back out unilaterally). It's rules probably demand that shares be treated as costs at current market value - since there is no easy way to predict future share prices. And once the "promise" (option) is there, it has to be accounted for in case it IS exercised.

Presumably, if the option is not exercised, then the liability dissappears as a nice bonus for an ailing company (and another employee ripped off by the system).

Presumably, now, too, the employee really hasn't earned anything until they either exercise the option for a profit or sell the option (if allowed!). So they shouldn'tpay taxes until the option is exercised.

Watch for the IRS someday soon to assign value to options and tax them as current income. After all, you CAN buy futures options on some listed stocks (and commodities) so there is a value there. Maybe they'll make you restate all previous years' income tax once the value of the option is determined on exercising it. After all, they are the government.

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