Corporations and the Decision to expense Employee Stock Options
Businesses have always been in competition with each other to provide ever increasing quality, timeliness, and innovativeness of their goods and services. In order for a business to do so, it first needs to attract talented employees. In recent years, one of the more popular strategies for not only luring talent, but keeping them was to offer Stock Options to potential employees. Another use of options that serves companies is in executive compensation packages. For many years critics have argued that salaries and bonuses have been far too excessive and in some cases unwarranted. When a business isn't performing well, should a CEO receive millions while the company's shareholders loose millions as the stock price wanes? To reduce compensation on the books, business had lowered executive pay only to make up for it with generous options offerings. This would also tie in compensation to performance, and hopefully motivate the CEO to see to it that shareholder value is maintained. Stock options have been around since the 1950's , but they have become under scrutiny in the last 20 years, and especially with the more recent dot-com bubble and Enron scandal. For the U.S.'s largest tech companies, in 1970, 3% of outstanding stock was set aside for top executives, in 1995 it was 10% , and in 2003 it was 14%, with total employee equity reaching about 19% .
A recent revision to FASB Statement 123 requires all businesses to eventually expense their options on their income statement using the Fair Value Method. The FASB concluded that: "[An entity in one circumstance (change in control) to settle ...