Aufwand für Mitarbeiteraktienoptionen
Companies should choose compensation methods according to their economic benefitsnot the way they are reported. Second, employees tend to reduce their risk by exercising vested stock options much earlier than a well-diversified investor would, thereby reducing the potential for a much higher payoff had they held the options to maturity. Sie können sehen, wie sich die Aufwendungen nicht verdoppeln, wie einige vorgeschlagen haben: Devisenhandel Gruppen In Oakville Ontario. Hier war die Levin-McCain-Rechnung.
Mögliche Grundformen für das Wort "aufwand"
Dabei stellt das inhärente Risiko die Anfälligkeit eines Prüfungsfeldes für eine fehlerhafte Darstellung dar. Substanzielle analytische Prüfungshandlungen sollen Zusammenhänge zwischen Daten des Rechnungswesen s untereinander bzw. Zusammenhänge zwischen Daten des Rechnungswesen s und Daten anderer betrieblicher Funktionsbereiche offenlegen.
Bei den sonstigen substanziellen Prüfungshandlungen handelt es sich vornehmlich um Einzelfallprüfungen, die sich auf ausgewählte Geschäftsvorfälle bzw. Ziel des Prüfungsansatzes ist unter Wesentlichkeitsgesichtspunkten u. Der ausgewiesene Personalaufwand muss weiter den tatsächlichen Aufwendungen des Unternehmen s für Löhne und Gehälter, soziale Abgaben und Aufwendungen für Altersversorgung entsprechen.
Mögliche fehlerhafte Darstellungen Vom Prüfer in Betracht zu ziehende fehlerhafte Darstellungen liegen insbes. Es werden Löhne und Gehälter für nicht genehmigte oder nicht geleistete Arbeit gezahlt oder zurückgestellt. Es erfolgen nicht gerechtfertigte Zahlungen. Zusatzvergütungen werden in falscher Höhe oder gar nicht verbucht. Führung von fiktiven Mitarbeitern auf den Lohn- und Gehaltskonten z.
Zeitnachweise werden überhöht ausgefüllt. Personalbezogene Rückstellungen werden in unzutreffender Höhe gebildet durch die Anwendung falscher Stundensätze oder aufgrund von Rechenfehlern.
Personalaufwendungen werden der falschen Periode zugeordnet oder in unzutreffender Höhe gebucht. Einbehalte der Lohn- und Gehaltszahlungen werden nicht gebucht. Überhöhte Beträge werden in der Lohn- und Gehaltsliste aufgelistet. Internes Kontrollsystem Der Prüfer sollte sich zunächst Kenntnisse von der relevanten Personal- und Entgeltstruktur verschaffen.
Von Interesse sind dabei folgende Fragestellungen: Nach der Bestimmung des Risikoprofils und einer ersten Wesentlichkeitseinschätzung des Prüfungsfeldes Personalaufwand hat sich der Prüfer von der Wirksamkeit des internen Kontrollsystems zu überzeugen.
Die vollständige Erfassung aller personalbezogenen Aufwendungen des jeweiligen Geschäftsjahres ist von der Unternehmensleitung durch interne Kontrolle n sicherzustellen.
Die Mitarbeiteranzahl ist anhand der aktuellen Lohn- und Gehaltsliste zu überprüfen, Auswertungen der Zeiterfassung sind von der Personalabteilung mit dem Lohnbuch unter Beachtung des Vier-Augen-Prinzips abzugleichen, und die Lohnabrechnungen sind mit den Sachkonten abzustimmen.
Von der Unternehmensleitung ist ebenfalls die tatsächliche Entstehung der personalbezogenen Aufwendungen sicherzustellen. Alle gebuchten Personalaufwendungen müssen deshalb die während des Geschäftsjahres vom Unternehmen zu vergütenden Ansprüche betreffen.
Hierfür ist eine Voraussetzung, dass die Lohn- und Gehaltslisten keine fiktiven oder zwischenzeitlich beendeten Arbeitsverhältnisse enthalten. Als diesbezügliche interne Kontrolle n kommen die schriftliche Dokumentation von Kündigungen und Neueinstellungen, die Überwachung nicht zur Auszahlung gelangter Beträge, die Abzeichnung aller Änderungen von Personalstammdaten, die Weiterleitung von Krankmeldungen, die Aushändigung von Steuerkarten nur gegen Empfangsbestätigung und der Abgleich der vorhandenen Steuerkarten bzw.
Sozialversicherungsnachweise mit der Anzahl der in der Lohn- bzw. Gehaltsliste erfassten Mitarbeiter in Frage. Weiterhin ist Voraussetzung, dass das Lohn- und Gehaltsjournal keine nicht geleisteten Arbeiten enthält. Die innerbetrieblichen Anweisungen für den Abzug von Fehlzeiten sind zu beachten. Die ausgewiesenen Personalaufwendungen müssen deshalb zu den richtigen Wertansätzen gebucht werden.
Die zweite Voraussetzung ist hierfür die richtige Ermittlung der Nettolöhne und -gehälter und ihre korrekte Auszahlung , die durch die Anwendung der jeweils aktuellen Tabellen z. Substanzielle analytische Prüfungshandlungen Der Prüfer sollte durch Vergleich e und Prüfung von Zusammenhängen Auffälligkeiten in der Veränderung und Entwicklung des Personalaufwandes untersuchen.
In Betracht kommen beispielsweise die Veränderungen des Personalaufwandes bezogen auf Abteilungen und Zeiträume, die Veränderung der Mitarbeiterzahl nach Abteilungen, Produkten und ergebnisabhängigen Vergütung en, die Entwicklung des Verhältnisses der Personalaufwendungen zu den Umsatzerlöse n, ein Abgleich von der abgeführten Lohnsteuer und Sozialabgaben mit den personalbezogenen Aufwendungen und das Verhältnis zwischen Gehältern und Löhnen im Zeitvergleich.
Zu analysieren ist ferner der durchschnittliche Lohnaufwand und die durchschnittliche Erhöhung des Personalaufwands pro Mitarbeiter, das Verhältnis der Sondervergütungen zu den gesamten Löhnen und Gehältern, besonders hohe jährliche variable Vergütungsbestandteile und der durchschnittliche monatliche Personalaufwand. Tangierte Posten Der Prüfungsansatz erfordert nicht nur die Abstimmung der Lohn- und Gehaltslisten mit dem gebuchten Personalaufwand, sondern auch mit den tangierten Jahresabschlussposten wie z.
Weitere den Posten Personalaufwand tangierende Posten stellen die Vorräte Personalaufwand als Bestandteil der Herstellungskosten , Rückstellungen für Pensionen und ähnliche Verpflichtungen sowie Sonstige Rückstellungen Urlaubsrückstände, Gleitzeitguthaben u.
Sonstige substanzielle Prüfungshandlungen Nach der Ausprägung des Risikoprofils, der Qualität des internen Kontrollsystems, dem Sicherheitsgrad substanzieller analytischer Prüfungshandlungen und dem organisatorischen Aufbau des Lohn- und Gehaltswesens richten sich die Art und der Umfang der sonstigen substanziellen Prüfungshandlungen.
Die Lohn- und Gehaltsabrechnungen sind stichprobenhaft durch Belege, z. Vereinbarungen über Bruttobezüge nebst sonstigen Vergütung en und über Stundensätze für Tarif-, Akkordmehr-, Prämien-, Mehrarbeits- und Nachtarbeitsstunden sowie über Sonntags-, Feiertags- oder Nachtarbeitszuschläge, unter Hinzuziehung entsprechender Zeiterfassungsnachweise zu prüfen.
Der Personalaufwand des Geschäftsjahres kann zur weiteren Abstimmung um die Änderung der Mitarbeiterzahl, der Mitarbeiterzusammensetzung und der Lohn- und Gehaltserhöhungen korrigiert und mit dem Personalaufwand des Vorjahres verglichen werden. Dabei ist festzustellen, ob die aufgeführten Personen auch Mitarbeiter des Unternehmen s sind. Lohn- und Gehaltsabrechnung mit den Auszahlung en lt.
Ferner sollen die Nettogehälter bzw. Nettolöhne mit den tatsächlichen Auszahlung en abgestimmt werden. Die zutreffende Kontierung und Verbuchung von Bruttolohn und -gehalt und anderen Vergütungsarten lt. In Stichprobe n sollten Sondervergütungen daraufhin geprüft werden, ob entsprechende Vereinbarungen vorliegen, ob sie richtig ermittelt und zutreffend kontiert wurden. Zuführungen zu den Pensionsrückstellungen sind durch versicherungsmathematische Gutachten zu belegen. Die Bestandteile der Geschäftsführer- und Vorstandsbezüge sind einzeln zu prüfen.
Teuerungsanpassung der Betriebsrenten in , in: Weil kein Bargeld die Hände bei der Erteilung des Zuschusses wechselt, ist die Ausgabe einer Aktienoption kein wirtschaftlich bedeutendes Geschäft. Das ist, was viele damals dachten. Im Jahr gab es wenig Theorie oder Praxis, um Unternehmen bei der Bestimmung des Wertes dieser nicht gehandelten Finanzinstrumente zu begleiten.
APB 25 war innerhalb eines Jahres veraltet. Es war sicher kein Zufall, dass das Wachstum der gehandelten Optionsmärkte durch eine zunehmende Nutzung von Aktienoptionszuschüssen in Exekutive und Mitarbeitervergütung widergespiegelt wurde. Es empfiehlt sich jedoch nicht, die Kosten der gewährten Optionen zu melden und ihren Marktwert zu bestimmen Mit option-pricing-modellen Der neue Standard war ein Kompromiss, der die intensive Lobbyarbeit von Geschäftsleuten und Politikern gegen die obligatorische Berichterstattung widerspiegelt.
Unvermeidlich wählten die meisten Unternehmen die Empfehlung zu ignorieren, dass sie sich so vehement ablehnten und weiterhin den intrinsischen Wert zum Stichtag, typischerweise null, ihrer Aktienoptionszuschüsse aufnahmen. Aber seit dem Unfall ist die Debatte mit einer Rache zurückgekehrt. Die Spate von Corporate Accounting Skandalen im Besonderen hat gezeigt, wie unwirklich ein Bild von ihrer wirtschaftlichen Leistung viele Unternehmen wurden in ihren Jahresabschlüssen gemalt. Wir glauben, dass der Fall für die Aufrechnungsoptionen überwältigend ist, und auf den folgenden Seiten prüfen und entlassen wir die Hauptansprüche derjenigen, die sich weiterhin dagegen stellen.
Wir diskutieren dann genau, wie Unternehmen über die Kosten der Optionen auf ihre Gewinn - und Verlustrechnung und Bilanzen berichten könnten. Aktienoptionen stellen keine realen Kosten dar. Es ist ein Grundprinzip der Rechnungslegung, dass der Jahresabschluss wirtschaftlich signifikante Transaktionen abgeben sollte.
Keiner bezweifelt, dass gehandelte Optionen dieses Kriterium Milliarden von Dollar wert sind gekauft und verkauft werden jeden Tag, entweder im over-the-counter Markt oder am Austausch. Diese Transaktionen sind nicht wirtschaftlich bedeutsam, das Argument geht, weil kein Bargeld die Hände wechselt. Diese Position widersetzt sich der ökonomischen Logik, ganz zu schweigen von gesundem Verstand, in mehrfacher Hinsicht. Für einen Start müssen Wertüberweisungen keine Geldtransfers beinhalten.
Während eine Transaktion mit Barzahlung oder Zahlung ausreicht, um eine beschreibbare Transaktion zu generieren, ist es nicht notwendig. Events such as exchanging stock for assets, signing a lease, providing future pension or vacation benefits for current-period employment, or acquiring materials on credit all trigger accounting transactions because they involve transfers of value, even though no cash changes hands at the time the transaction occurs.
Even if no cash changes hands, issuing stock options to employees incurs a sacrifice of cash, an opportunity cost, which needs to be accounted for. If a company were to grant stock, rather than options, to employees, everyone would agree that the companys cost for this transaction would be the cash it otherwise would have received if it had sold the shares at the current market price to investors.
It is exactly the same with stock options. When a company grants options to employees, it forgoes the opportunity to receive cash from underwriters who could take these same options and sell them in a competitive options market to investors. Warren Buffett made this point graphically in an April 9, , Washington Post column when he stated: Berkshire Hathaway will be happy to receive options in lieu of cash for many of the goods and services that we sell corporate America.
Granting options to employees rather than selling them to suppliers or investors via underwriters involves an actual loss of cash to the firm.
It can, of course, be more reasonably argued that the cash forgone by issuing options to employees, rather than selling them to investors, is offset by the cash the company conserves by paying its employees less cash. As two widely respected economists, Burton G. Malkiel and William J. Baumol, noted in an April 4, , Wall Street Journal article: A new, entrepreneurial firm may not be able to provide the cash compensation needed to attract outstanding workers. Instead, it can offer stock options.
But Malkiel and Baumol, unfortunately, do not follow their observation to its logical conclusion. For if the cost of stock options is not universally incorporated into the measurement of net income, companies that grant options will underreport compensation costs, and it wont be possible to compare their profitability, productivity, and return-on-capital measures with those of economically equivalent companies that have merely structured their compensation system in a different way.
The following hypothetical illustration shows how that can happen. Imagine two companies, KapCorp and MerBod, competing in exactly the same line of business. The two differ only in the structure of their employee compensation packages. KapCorp pays its workers , in total compensation in the form of cash during the year.
At the beginning of the year, it also issues, through an underwriting, , worth of options in the capital market, which cannot be exercised for one year, and it requires its employees to use 25 of their compensation to buy the newly issued options.
The net cash outflow to KapCorp is , , in compensation expense less , from the sale of the options. MerBods approach is only slightly different. It pays its workers , in cash and issues them directly , worth of options at the start of the year with the same one-year exercise restriction. Economically, the two positions are identical. Each company has paid a total of , in compensation, each has issued , worth of options, and for each the net cash outflow totals , after the cash received from issuing the options is subtracted from the cash spent on compensation.
Employees at both companies are holding the same , of options during the year, producing the same motivation, incentive, and retention effects. How legitimate is an accounting standard that allows two economically identical transactions to produce radically different numbers In preparing its year-end statements, KapCorp will book compensation expense of , and will show , in options on its balance sheet in a shareholder equity account.
If the cost of stock options issued to employees is not recognized as an expense, however, MerBod will book a compensation expense of only , and not show any options issued on its balance sheet. Assuming otherwise identical revenues and costs, it will look as though MerBods earnings were , higher than KapCorps.
MerBod will also seem to have a lower equity base than KapCorp, even though the increase in the number of shares outstanding will eventually be the same for both companies if all the options are exercised. As a result of the lower compensation expense and lower equity position, MerBods performance by most analytic measures will appear to be far superior to KapCorps.
This distortion is, of course, repeated every year that the two firms choose the different forms of compensation. How legitimate is an accounting standard that allows two economically identical transactions to produce radically different numbers Fallacy 2: Option-pricing models may work, they say, as a guide for valuing publicly traded options. But they cant capture the value of employee stock options, which are private contracts between the company and the employee for illiquid instruments that cannot be freely sold, swapped, pledged as collateral, or hedged.
It is indeed true that, in general, an instruments lack of liquidity will reduce its value to the holder. But the holders liquidity loss makes no difference to what it costs the issuer to create the instrument unless the issuer somehow benefits from the lack of liquidity. And for stock options, the absence of a liquid market has little effect on their value to the holder. The great beauty of option-pricing models is that they are based on the characteristics of the underlying stock.
Thats precisely why they have contributed to the extraordinary growth of options markets over the last 30 years. The Black-Scholes price of an option equals the value of a portfolio of stock and cash that is managed dynamically to replicate the payoffs to that option.
With a completely liquid stock, an otherwise unconstrained investor could entirely hedge an options risk and extract its value by selling short the replicating portfolio of stock and cash. In that case, the liquidity discount on the options value would be minimal. And that applies even if there were no market for trading the option directly.
Therefore, the liquidityor lack thereofof markets in stock options does not, by itself, lead to a discount in the options value to the holder. Investment banks, commercial banks, and insurance companies have now gone far beyond the basic, year-old Black-Scholes model to develop approaches to pricing all sorts of options: Options traded through intermediaries, over the counter, and on exchanges. Options linked to currency fluctuations. Options embedded in complex securities such as convertible debt, preferred stock, or callable debt like mortgages with prepay features or interest rate caps and floors.
A whole subindustry has developed to help individuals, companies, and money market managers buy and sell these complex securities. Current financial technology certainly permits firms to incorporate all the features of employee stock options into a pricing model. A few investment banks will even quote prices for executives looking to hedge or sell their stock options prior to vesting, if their companys option plan allows it.
Of course, formula-based or underwriters estimates about the cost of employee stock options are less precise than cash payouts or share grants. But financial statements should strive to be approximately right in reflecting economic reality rather than precisely wrong. Managers routinely rely on estimates for important cost items, such as the depreciation of plant and equipment and provisions against contingent liabilities, such as future environmental cleanups and settlements from product liability suits and other litigation.
When calculating the costs of employees pensions and other retirement benefits, for instance, managers use actuarial estimates of future interest rates, employee retention rates, employee retirement dates, the longevity of employees and their spouses, and the escalation of future medical costs.
Pricing models and extensive experience make it possible to estimate the cost of stock options issued in any given period with a precision comparable to, or greater than, many of these other items that already appear on companies income statements and balance sheets.
Not all the objections to using Black-Scholes and other option valuation models are based on difficulties in estimating the cost of options granted. For example, John DeLong, in a June Competitive Enterprise Institute paper entitled The Stock Options Controversy and the New Economy, argued that even if a value were calculated according to a model, the calculation would require adjustment to reflect the value to the employee.
He is only half right. By paying employees with its own stock or options, the company forces them to hold highly non-diversified financial portfolios, a risk further compounded by the investment of the employees own human capital in the company as well.
Since almost all individuals are risk averse, we can expect employees to place substantially less value on their stock option package than other, better-diversified, investors would. Estimates of the magnitude of this employee risk discountor deadweight cost, as it is sometimes calledrange from 20 to 50, depending on the volatility of the underlying stock and the degree of diversification of the employees portfolio.
The existence of this deadweight cost is sometimes used to justify the apparently huge scale of option-based remuneration handed out to top executives. A company seeking, for instance, to reward its CEO with 1 million in options that are worth 1, each in the market may perhaps perversely reason that it should issue 2, rather than 1, options because, from the CEOs perspective, the options are worth only each.
We would point out that this reasoning validates our earlier point that options are a substitute for cash. But while it might arguably be reasonable to take deadweight cost into account when deciding how much equity-based compensation such as options to include in an executives pay packet, it is certainly not reasonable to let dead-weight cost influence the way companies record the costs of the packets.
Financial statements reflect the economic perspective of the company, not the entities including employees with which it transacts. When a company sells a product to a customer, for example, it does not have to verify what the product is worth to that individual. It counts the expected cash payment in the transaction as its revenue.
Similarly, when the company purchases a product or service from a supplier, it does not examine whether the price paid was greater or less than the suppliers cost or what the supplier could have received had it sold the product or service elsewhere.
The company records the purchase price as the cash or cash equivalent it sacrificed to acquire the good or service. Suppose a clothing manufacturer were to build a fitness center for its employees.
The company would not do so to compete with fitness clubs. It would build the center to generate higher revenues from increased productivity and creativity of healthier, happier employees and to reduce costs arising from employee turnover and illness.
The cost to the company is clearly the cost of building and maintaining the facility, not the value that the individual employees might place on it. The cost of the fitness center is recorded as a periodic expense, loosely matched to the expected revenue increase and reductions in employee-related costs.
The only reasonable justification we have seen for costing executive options below their market value stems from the observation that many options are forfeited when employees leave, or are exercised too early because of employees risk aversion. In these cases, existing shareholders equity is diluted less than it would otherwise be, or not at all, consequently reducing the companys compensation cost.
While we agree with the basic logic of this argument, the impact of forfeiture and early exercise on theoretical values may be grossly exaggerated. The Real Impact of Forfeiture and Early Exercise Unlike cash salary, stock options cannot be transferred from the individual granted them to anyone else.
Nontransferability has two effects that combine to make employee options less valuable than conventional options traded in the market. First, employees forfeit their options if they leave the company before the options have vested. Second, employees tend to reduce their risk by exercising vested stock options much earlier than a well-diversified investor would, thereby reducing the potential for a much higher payoff had they held the options to maturity.
Employees with vested options that are in the money will also exercise them when they quit, since most companies require employees to use or lose their options upon departure. In both cases, the economic impact on the company of issuing the options is reduced, since the value and relative size of existing shareholders stakes are diluted less than they could have been, or not at all.
Recognizing the increasing probability that companies will be required to expense stock options, some opponents are fighting a rearguard action by trying to persuade standard setters to significantly reduce the reported cost of those options, discounting their value from that measured by financial models to reflect the strong likelihood of forfeiture and early exercise. Current proposals put forth by these people to FASB and IASB would allow companies to estimate the percentage of options forfeited during the vesting period and reduce the cost of option grants by this amount.
Also, rather than use the expiration date for the option life in an option-pricing model, the proposals seek to allow companies to use an expected life for the option to reflect the likelihood of early exercise. Using an expected life which companies may estimate at close to the vesting period, say, four years instead of the contractual period of, say, ten years, would significantly reduce the estimated cost of the option.
Some adjustment should be made for forfeiture and early exercise. But the proposed method significantly overstates the cost reduction since it neglects the circumstances under which options are most likely to be forfeited or exercised early.
When these circumstances are taken into account, the reduction in employee option costs is likely to be much smaller. Using a flat percentage for forfeitures based on historical or prospective employee turnover is valid only if forfeiture is a random event, like a lottery, independent of the stock price.
In reality, however, the likelihood of forfeiture is negatively related to the value of the options forfeited and, hence, to the stock price itself.
People are more likely to leave a company and forfeit options when the stock price has declined and the options are worth little. But if the firm has done well and the stock price has increased significantly since grant date, the options will have become much more valuable, and employees will be much less likely to leave.
If employee turnover and forfeiture are more likely when the options are least valuable, then little of the options total cost at grant date is reduced because of the probability of forfeiture. The argument for early exercise is similar. It also depends on the future stock price.
Employees will tend to exercise early if most of their wealth is bound up in the company, they need to diversify, and they have no other way to reduce their risk exposure to the companys stock price. Senior executives, however, with the largest option holdings, are unlikely to exercise early and destroy option value when the stock price has risen substantially. Often they own unrestricted stock, which they can sell as a more efficient means to reduce their risk exposure.
Or they have enough at stake to contract with an investment bank to hedge their option positions without exercising prematurely. As with the forfeiture feature, the calculation of an expected option life without regard to the magnitude of the holdings of employees who exercise early, or to their ability to hedge their risk through other means, would significantly underestimate the cost of options granted.
Option-pricing models can be modified to incorporate the influence of stock prices and the magnitude of employees option and stock holdings on the probabilities of forfeiture and early exercise. The actual magnitude of these adjustments needs to be based on specific company data, such as stock price appreciation and distribution of option grants among employees.
The adjustments, properly assessed, could turn out to be significantly smaller than the proposed calculations apparently endorsed by FASB and IASB would produce. Indeed, for some companies, a calculation that ignores forfeiture and early exercise altogether could come closer to the true cost of options than one that entirely ignores the factors that influence employees forfeiture and early exercise decisions.
Stock Option Costs Are Already Adequately Disclosed Another argument in defense of the existing approach is that companies already disclose information about the cost of option grants in the footnotes to the financial statements. Investors and analysts who wish to adjust income statements for the cost of options, therefore, have the necessary data readily available. We find that argument hard to swallow. As we have pointed out, it is a fundamental principle of accounting that the income statement and balance sheet should portray a companys underlying economics.
Relegating an item of such major economic significance as employee option grants to the footnotes would systematically distort those reports. But even if we were to accept the principle that footnote disclosure is sufficient, in reality we would find it a poor substitute for recognizing the expense directly on the primary statements. For a start, investment analysts, lawyers, and regulators now use electronic databases to calculate profitability ratios based on the numbers in companies audited income statements and balance sheets.
An analyst following an individual company, or even a small group of companies, could make adjustments for information disclosed in footnotes. But that would be difficult and costly to do for a large group of companies that had put different sorts of data in various nonstandard formats into footnotes.
Clearly, it is much easier to compare companies on a level playing field, where all compensation expenses have been incorporated into the income numbers. Whats more, numbers divulged in footnotes can be less reliable than those disclosed in the primary financial statements.
For one thing, executives and auditors typically review supplementary footnotes last and devote less time to them than they do to the numbers in the primary statements. As just one example, the footnote in eBays FY annual report reveals a weighted average grant-date fair value of options granted during of Just how the value of options granted can be 63 more than the value of the underlying stock is not obvious.
In FY , the same effect was reported: Apparently, this error was finally detected, since the FY report retroactively adjusted the and average grant-date fair values to We believe executives and auditors will exert greater diligence and care in obtaining reliable estimates of the cost of stock options if these figures are included in companies income statements than they currently do for footnote disclosure.
Our colleague William Sahlman in his December HBR article, Expensing Options Solves Nothing, has expressed concern that the wealth of useful information contained in the footnotes about the stock options granted would be lost if options were expensed.
But surely recognizing the cost of options in the income statement does not preclude continuing to provide a footnote that explains the underlying distribution of grants and the methodology and parameter inputs used to calculate the cost of the stock options.
Some critics of stock option expensing argue, as venture capitalist John Doerr and FedEx CEO Frederick Smith did in an April 5, , New York Times column, that if expensing were required, the impact of options would be counted twice in the earnings per share: The result would be inaccurate and misleading earnings per share. We have several difficulties with this argument. First, option costs only enter into a GAAP-based diluted earnings-per-share calculation when the current market price exceeds the option exercise price.
Thus, fully diluted EPS numbers still ignore all the costs of options that are nearly in the money or could become in the money if the stock price increased significantly in the near term. Second, relegating the determination of the economic impact of stock option grants solely to an EPS calculation greatly distorts the measurement of reported income, would not be adjusted to reflect the economic impact of option costs.
These measures are more significant summaries of the change in economic value of a company than the prorated distribution of this income to individual shareholders revealed in the EPS measure. This becomes eminently clear when taken to its logical absurdity: Suppose companies were to compensate all their suppliersof materials, labor, energy, and purchased serviceswith stock options rather than with cash and avoid all expense recognition in their income statement.
Their income and their profitability measures would all be so grossly inflated as to be useless for analytic purposes only the EPS number would pick up any economic effect from the option grants. Our biggest objection to this spurious claim, however, is that even a calculation of fully diluted EPS does not fully reflect the economic impact of stock option grants. The following hypothetical example illustrates the problems, though for purposes of simplicity we will use grants of shares instead of options.
The reasoning is exactly the same for both cases. Lets say that each of our two hypothetical companies, KapCorp and MerBod, has 8, shares outstanding, no debt, and annual revenue this year of , KapCorp decides to pay its employees and suppliers 90, in cash and has no other expenses.
MerBod, however, compensates its employees and suppliers with 80, in cash and 2, shares of stock, at an average market price of 5 per share. The cost to each company is the same: But their net income and EPS numbers are very different.
KapCorps net income before taxes is 10,, or 1. By contrast, MerBods reported net income which ignores the cost of the equity granted to employees and suppliers is 20,, and its EPS is 2. Of course, the two companies now have different cash balances and numbers of shares outstanding with a claim on them. But KapCorp can eliminate that discrepancy by issuing 2, shares of stock in the market during the year at an average selling price of 5 per share.
Now both companies have closing cash balances of 20, and 10, shares outstanding. Under current accounting rules, however, this transaction only exacerbates the gap between the EPS numbers. KapCorps reported income remains 10,, since the additional 10, value gained from the sale of the shares is not reported in net income, but its EPS denominator has increased from 8, to 10, The people claiming that options expensing creates a double-counting problem are themselves creating a smoke screen to hide the income-distorting effects of stock option grants.
Indeed, if we say that the fully diluted EPS figure is the right way to disclose the impact of share options, then we should immediately change the current accounting rules for situations when companies issue common stock, convertible preferred stock, or convertible bonds to pay for services or assets.
At present, when these transactions occur, the cost is measured by the fair market value of the consideration involved. Why should options be treated differently Fallacy 4: Expensing Stock Options Will Hurt Young Businesses Opponents of expensing options also claim that doing so will be a hardship for entrepreneurial high-tech firms that do not have the cash to attract and retain the engineers and executives who translate entrepreneurial ideas into profitable, long-term growth.
This argument is flawed on a number of levels. For a start, the people who claim that option expensing will harm entrepreneurial incentives are often the same people who claim that current disclosure is adequate for communicating the economics of stock option grants.
The two positions are clearly contradictory. If current disclosure is sufficient, then moving the cost from a footnote to the balance sheet and income statement will have no market effect. But to argue that proper costing of stock options would have a significant adverse impact on companies that make extensive use of them is to admit that the economics of stock options, as currently disclosed in footnotes, are not fully reflected in companies market prices.
More seriously, however, the claim simply ignores the fact that a lack of cash need not be a barrier to compensating executives. Rather than issuing options directly to employees, companies can always issue them to underwriters and then pay their employees out of the money received for those options.
Considering that the market systematically puts a higher value on options than employees do, companies are likely to end up with more cash from the sale of externally issued options which carry with them no deadweight costs than they would by granting options to employees in lieu of higher salaries.
Even privately held companies that raise funds through angel and venture capital investors can take this approach. The same procedures used to place a value on a privately held company can be used to estimate the value of its options, enabling external investors to provide cash for options about as readily as they provide cash for stock. Thats not to say, of course, that entrepreneurs should never get option grants.
Venture capital investors will always want employees to be compensated with some stock options in lieu of cash to be assured that the employees have some skin in the game and so are more likely to be honest when they tout their companys prospects to providers of new capital.
But that does not preclude also raising cash by selling options externally to pay a large part of the cash compensation to employees. We certainly recognize the vitality and wealth that entrepreneurial ventures, particularly those in the high-tech sector, bring to the U. A strong case can be made for creating public policies that actively assist these companies in their early stages, or even in their more established stages.
The nation should definitely consider a regulation that makes entrepreneurial, job-creating companies healthier and more competitive by changing something as simple as an accounting journal entry. But we have to question the effectiveness of the current rule, which essentially makes the benefits from a deliberate accounting distortion proportional to companies use of one particular form of employee compensation. After all, some entrepreneurial, job-creating companies might benefit from picking other forms of incentive compensation that arguably do a better job of aligning executive and shareholder interests than conventional stock options do.
Indexed or performance options, for example, ensure that management is not rewarded just for being in the right place at the right time or penalized just for being in the wrong place at the wrong time.
A strong case can also be made for the superiority of properly designed restricted stock grants and deferred cash payments. Yet current accounting standards require that these, and virtually all other compensation alternatives, be expensed. Are companies that choose those alternatives any less deserving of an accounting subsidy than Microsoft, which, having granted million options in alone, is by far the largest issuer of stock options A less distorting approach for delivering an accounting subsidy to entrepreneurial ventures would simply be to allow them to defer some percentage of their total employee compensation for some number of years, which could be indefinitelyjust as companies granting stock options do now.
That way, companies could get the supposed accounting benefits from not having to report a portion of their compensation costs no matter what form that compensation might take.
What Will Expensing Involve Although the economic arguments in favor of reporting stock option grants on the principal financial statements seem to us to be overwhelming, we do recognize that expensing poses challenges. For a start, the benefits accruing to the company from issuing stock options occur in future periods, in the form of increased cash flows generated by its option motivated and retained employees.
The fundamental matching principle of accounting requires that the costs of generating those higher revenues be recognized at the same time the revenues are recorded. This is why companies match the cost of multiperiod assets such as plant and equipment with the revenues these assets produce over their economic lives.
In some cases, the match can be based on estimates of the future cash flows.
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