Talk:Employee stock option/Archives/2013

Expensing

Every other expense decreases the net worth of the corporation, whereas stock options, when exercised, actually increase it.

You mean the shareholders' equity increase when stock option are exercised?--Jerryseinfeld 21:01, 2 Jan 2005 (UTC)

When stock options are recognized in earnings, (not necessarily when issued (granted)) by the reporting entity who is the employer, an expense linked to compensation is created in the Income Statement offset by a reduction in the Tax Expense meaning that net Earnings for this period decreases, thereby effectively contributing a reduction in Retained Earnings. However, simultaneously, Additional Paid in Capital in Equity is increased (assuming a 'plain vanilla' equity award) and a Deferred Tax Benefit is recorded on the balance sheet (the tax benefit does not create cash benefit unless the stock options are exercised). A separate series of events occurs when the options are exercised or alternatively when the options expire unexercised. Pending reactions to my summary I will post this as an edit to the article. Breizhtalk (talk) 03:51, 15 March 2013 (UTC)

I don't know with confidence what the anon meant, but I will point out is that the nature of stock options is that theory would say that typically when someone, not previously a stockholder, exercises a stock option, the equity of each preexisting shareholder is reduced, but total shareholder equity is not (because a new shareholder has just been created). If options are exercised and the share price fails to drop accordingly, then total shareholders' equity would actually increase. -- Jmabel | Talk 02:50, Jan 3, 2005 (UTC)

This comment redefines the problem of options to be the problem of dilution from the issue of more shares. This is not the issue. That particular problem has different math and different solutions. See book value for that issue. The issue of employee stock options is about the valuation of the discount to market value at which the shares are issued.Retail Investor 16:00, 16 October 2006 (UTC)

The statement is correct, because the company did get paid for the shares of stock issued to the employee. This amount certainly undervalues the company and "cheats" it of money it would have had if it had instead issued new stock at the market price. But, nevertheless, the company did get paid, so it has more cash today than it did yesterday. Tempshill 06:51, 14 Feb 2005 (UTC)

Tempshill says "who cares how much is paid?" Well I care. When mangement does not get full value for sales of the company assets, I care. The company assets do not belong to them, they belong to me, the shareholder. Equity is the communal ownership of all the assets. When equity is sold, I do not allow mangement to give it away at a discount, and pocket the difference for themselves.Retail Investor 16:00, 16 October 2006 (UTC)

The reason stock options need to be expensed is to show "compensation expense." You would do the exact same thing if you gave your cash, cars, stock options, etc. The expense shows that something was paid out to forfill an obligation. The stock option exists so that the employee will hopefully stick with the company--a comparable benefit would be a significant raise. Therefore it should be an expense. -- Zoop 06:45, 14 August 2005 (UTC)

The fact that someone benefits doesn't make it inherently expensible. For example, if a company were to feature a client on their website, bringing a valuable benefit of publicity to that client, that is not expensible beyond whatever actual costs are involved in creation and hosting of the web site. All of those examples you give would be actual expenses to the company, in any view.

This comment indicates a misunderstanding of "opportunity cost". The example involved no opportunity cost, but the issue of options does. If the website was in the business of selling promo space, and instead decided to give away the space to friends of management, the shareholders (who just saw their net income demolished) would indeed consider the forgone revenue as management compensation.Retail Investor 16:00, 16 October 2006 (UTC)

The controversy over whether stock options should be expensible comes down to the following. On one hand, if the company is viewed as a standalone, stock options cost it nothing. On the other, they do cost the stockholders something. The company doesn't care who its owners are, but the value owned by each prior shareholder is diluted when options are cashed in at a favorable rate. From the former point of view—the accounting that prevailed for decades—stock options are not an expense. From the latter—currently in favor—they are, and they are a well-targeted expense only if they result (presumably through retention and motivation of employees) in generation of value for prior shareholders that exceeds the expense. Since, in theory, the company is operated for the benefit of its stockholders, the argument for treating employee options as an expense is certainly reasonable, but it's all a matter of point of view: this dilution does not add to the company's debt burden and so, for example, it does not matter to bank loan officer or to a potential purchaser of a bond. It's all a matter of for whom the balance sheet is prepared. -- Jmabel | Talk 07:39, August 14, 2005 (UTC)

All the Financial Statements are targeted at, and report from the point of view of the shareholders. Regardless the opportunity cost of options is a cost from both the company's POV and from the shareholders' POV. The company could have received the full market value for the shares and benefited from the increased cash (eg. to pay management higher wages).Retail Investor 16:00, 16 October 2006 (UTC)