Stock Options
In the wake of corporate scandals causing some workers to lose their retirements, politicians, the investor class, and money managers began investigating how they could have been duped by the Chief Executives and Chief Financial Officers of the corporations whose stock comprises countless retirement plans across the country. Many believe one way investors were deceived was by an accounting rule that does not require one prominent form of executive compensation to show up as an expense on the books.Essentially, stock options are contracts that give their owner the right to buy shares of stock of a company at a predetermined "strike" price on a specified date, generally seven to ten years into the future. If the stock price of a company rises, the owner of the options makes money because he gets to pay the price specified in the contract, which will be lower than the actual stock market price. The difference between what he has to pay and the market price is paid the company. Since the job of an executive is to make money for the shareholders, his pay should be linked to making money for the shareholders. There is no question about that, all people should be compensated according to how well
According to their logic, not issuing stock options would mean less talent and investment would be attracted to our technology companies, which would hinder the economy. However, some members of congress want to prevent the FASB from requiring companies to expense options. Before dotcoms, executives were compensated with stock. Since the issue is so complex, one may wonder whether it is worth it to issue stock options at all. They cannot be converted to cash until they are first converted to stock, and they can only be converted to stock on a certain date, which is seven to ten years into the future. The bi-partisan group believes stock options are a positive and changing the rules would make companies less inclined to issue stock options. Rational investors would choose to put their money with the company that isn't expensing the options. Proponents of expensing say stock options cost the company cash, which reduces the amount of money available to shareholders, therefore options should show up as an expense on the financial statements. Seeing the expense alerts shareholders that the company may have to shell out a good bit of cash in the future, and the warning allows them to make a better investment decision. However, giving companies the choice makes it difficult to compare. I'm all for paying executives what their worth, but I'm also for telling investors how much the executives are being paid. The end result of expensing stock options will be a healthier economy and more prosperity for investors. It seems logical, since their job is to increase the value of the stock, linking their pay to the stock price should give them incentive to make the stock price increase. Since the managers and key employees couldn't be paid with cash, the only form of compensation available was by issue sock or stock options.
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