Talk:Employee stock option

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Contents 1 Expensing 2 Holding for a year 3 U.S. taxation 4 Stuff taken care of with rewrite 4.1 Opening sentence 4.2 bad link 5 POV 6 Still POV and confusing

[edit] 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)

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)

[edit] Holding for a year

Although it reduces taxes, the strategy of exercising, holding for one year, and then selling is riskier because of the possibility the stock price will drop in the intervening year.

Would be interesting to expand on this. I remember a lot of Microsoft employees apparently got bitten because at the peak of the dot-com bubble, they exercised, then held, and a year later their stock was worth 60% of what it had been worth ... but because they exercised at such a high price, they had to pay AMT or something which put everyone into the red who was in this situation. There was an attempt at a class action to sue all the tax advisors who told Microsoft employees they should do this. Tempshill 23:03, 19 Feb 2005 (UTC)

[edit] U.S. taxation

Among other (clearly mostly accurate) additions to the article, "The employee is also not taxed when he exercises the options." If this is true, it represents a relatively recent change in tax law. Can someone provide a citation for this? -- Jmabel | Talk 06:23, Feb 20, 2005 (UTC)

Actually, it is a whole hell of a lot more complicated than that. For one thing ISO's and NQ's are taxed differently. For another, exercise of options is always added back in for the purpose of the calculation of the AMT, even if current regular income taxation is not due. I don't have all the appropriate sources in front of me now, but "Options are taxed when unrestricted property rights vest or when the restrictions on the enjoyment of the property lapse."[1] That happens when you exercise the option, so I think the statement is wrong. There will be currently recognized taxable income if the value of the stock is higher than the exercise price of the option at the time of exercise. A more detailed source is here. Those are both from Unclefed.com, a site I have never heard of, so I will try to verify from reliable sources when I can. - Taxman 12:41, Feb 20, 2005 (UTC)

see edits: NQSOs are taxed as ordinary income. ISOs are taxed as capital gains if certain requirements are met. This includes the requirement that shares acquired upon exercise are held for at least a year. An individual is also not allowed to exercise more than $100,000 worth of stock options in any given year. They are very unusual in the marketplace as the executive gains more than the company. The amount of tax paid by the employee is taken as a tax deduction. The higher taxes resulting from NQSOs result in similarly higher deductions - thus the granting of ISOs is a loss to the company. Only for privileged and beloved executives. Guest

[edit] Stuff taken care of with rewrite

[edit] Opening sentence

The opening sentence of this article may be a tad biased. It says that "Employee stock options are stock options for the company's own stock that are often offered to upper-level employees as part of the executive compensation package,..." (emphasis added). However a lot of the push-back on expensing these options has come from companies that offer the options much more widely than that. I would recommend removing the phrase from the opening sentence, where it seems to be an oblique critique, and discuss it more fully further down in the article. It would be reasonable to state that companies differ in their philosophies, with some granting options to upper-level employees, and others using a wider distribution (including options for essentially all employees in some cases.) 192.55.52.3 18:15, 18 October 2005 (UTC)

[edit] bad link

the link to stockholder equity in the section: Employee stock option#Rationale for stock option grants, points to equity which is not stockholder equity. Perhaps it should point to Shareholders' equity.—The preceding unsigned comment was added by Nafeger (talk • contribs) 29 September 2006.

[edit] POV

How on earth is this supposed to be NPOV (emphases mine):

It was argued for many years that options had no cost because there was no cash flow, and because the value of the company did not decrease. Eventually the clearer heads prevailed. Barter transactions that involve no cash (employment for shares) still have an implicit value. The opportunity cost of foregoing receipt of full market value for the issue of new shares is a 'true' cost. Yes, the equity of the business does go up: but not as much as it should have.

I have deleted the "clearer heads". I agree - was subjective - I'm sorry. Regarding "should have"...that phrase defines the issue of opportunity cost. The phase is not a subjective valuation. The measurement issue of options is all about opportunity cost. See my comments in the top section of how the concept fits in. I have changed to "Yes, the equity goes up (when management expense is not measured) because 'some' money was received. But the equity has a market value that should be recognized."Retail Investor 16:10, 19 October 2006 (UTC)

And it is also quite uncited in a highly controversial area.

The resulting changes to GAAP are proof enough aren't they?Retail Investor 16:10, 19 October 2006 (UTC)

As far as I can tell, the article is currently laced through with things like this. - Jmabel | Talk 05:54, 19 October 2006 (UTC)

My comments in the first section cover all of them I think. That is why I put them there. Can you respond to them please?Retail Investor 16:10, 19 October 2006 (UTC)

Also, the following, which was absolutely solidly cited, was removed (along with some less cited but congruent content

Martin J. Whitman argues that while stock options may dilute the value held by each of a company's existing shareholders, they are of little concern to creditors, and that "GAAP (generally accepted accounting principles) ought to be geared toward meeting the needs and desires of creditors rather than the needs and desires of short-term stock market speculators."

The citation was (and is) Martin J. Whitman, Third Avenue Value Fund Letters to our Shareholders July 31, 2004 (PDF), page 2.

I put this back as a "pro"argumentRetail Investor 16:10, 19 October 2006 (UTC)

- Jmabel | Talk 05:58, 19 October 2006 (UTC)

[edit] Still POV and confusing

I have restored {{POV}} and {{confusing}}. I would have thought some of the problems were obvious, but apparently not. Here are a few; the list is by no means exhaustive.

POV

In the section "Arguments Pro and Con employee options", nearly none of the "pro" or "con" arguments are cited; this makes them nothing more than uncited opinions.

I did not input these arguments. They were already on the page in different places. They were not considered "uncited" then, probably because the arguments are in every newspaper.Retail Investor 20:27, 5 November 2006 (UTC)

"This is not a 'victimless crime'.": the suggestion of criminality is extremely POV.

This was not a reference to criminality. It refers to the argument that..."while options are a benefit to management, they are not a cost to the company". If you want to change the wording go ahead.Retail Investor 20:27, 5 November 2006 (UTC)

The term "lower staff" is extremely condescending. For example, a senior techical person is hardly "lower" than a first-level manager.

Since you find the term offensive, change it.Retail Investor 20:27, 5 November 2006 (UTC)

Confusing

The section "Share buybacks do not offset the cost of options" begins with a footnote. If that's not confusing, I can't imagine what would be.

Since you complain about citing, I thought you would approve. Since you don't want it there, move it.Retail Investor 20:27, 5 November 2006 (UTC)

There is a reference to "The following diagram" in a section with no diagram.

The diagram opens on my computer. I don't know why yours doesn't load it. What exactly happens?Retail Investor 20:27, 5 November 2006 (UTC)

The Whitman material (which I added many versions back in a different context) is, in fact, neither "pro" nor "con" employee stock options: it comes from a discussion of whether ESOs should be counted as an expense and, given the way the article has been restructured, probably belongs in the section on GAAP, which is what he was writing about.

I tried my best to put it where it belongs. Since this page is not discussing whether financial statements should be constructed from the POV of borrowers, or the POV of owners, I felt it had no place. I only put it there to mollify you. Put it where you want.Retail Investor 20:27, 5 November 2006 (UTC)

Right from the first sentence, "Employee stock options are call options on the company's own stock." (Rhetorical question:) When does a company issue call options on another company's stock? (Non-rhetorical question:) Shouldn't this say "Employee stock options call options on a company's stock, issued to its own employees"? Similarly "They are mostly offered to management…" Options are not offered to management collectively, they are offered to individual managers.

None of this was my creation. I just cut and paste from the previous page that you had no problems with. Beats me why you don't think it worth changing yourself, but worth criticising others for.Retail Investor 20:27, 5 November 2006 (UTC)

Confusing at best

Is it accurate to say that employee stock options can be offered to suppliers? I've never heard of this being done, and I've been involved in at least four startups. The statement was uncited, so I have nowhere in particular to go to try to verify it.

But you agree that lawyers and promoters were offered option? Are they not suppliers?Retail Investor 20:27, 5 November 2006 (UTC)

"In the event of the death of the employee, the spouse inherits all the vested options." I believe this is not strictly true: they are an asset of the estate, just like any other. One need not be married to have heirs.

Again, not my input, but you didn't object to it before. Change it if you think you know better.Retail Investor 20:27, 5 November 2006 (UTC)

Again, this is not intended as an exhaustive list of what is POV or confusing in this article, just as a set of representative examples. - Jmabel | Talk 02:12, 5 November 2006 (UTC)