abh3vt, re options, I totally agree that cash is the way to go. In fact, one of the best questions to ask is why in the world would management use such a complicated system that even they claim they can't understand, when such a simple one (cash) is available?
The only answer is that it's to their benefit. Hugely to their benefit, and a huge ripoff to the other shareholders and even to all taxpayers. I contend they understand it entirely. Options are an almost socialist system in which the employees are stealing from the owners. I think it's been one of the largest wealth transfers in history.
"If a company just granted stock, and transferred all the risk of ownership to the new owner, then would that remove the time value component of the expense? If issued at market price, then wouldn't the "intrinsic value" of that stock be expensed by the company in the quarter the stock was granted? Sounds much cleaner to me, and from an accounting perspective is more in line with what the income statement is supposed to represent (i.e expenses associated with actions taken to generate sales in a certain time period)."
Absolutely, would be far cleaner. The reason it's not done? It's not to management's benefit. It would cause all the costs and burdens to be exposed right now, as opposed to giving management a free 10-year roll of the dice (at the expense of the shareholders), with no downside if it doesn't work out. Wouldn't allow them to cook the books anymore and push up the stock price fraudulently, which coincidentally makes their options more valuable.
A straight granting of stock would cause an immediate expense, an immediate increase in the fully diluted share count, and, perhaps most importantly and most overlooked, an immediate tax impact on the manager receiving the stock. And it would correctly be at ordinary income rates. That's yet another part of what a scam options are. Managers get to turn ordinary income into capital gains. Huge ripoff of the taxpayer.
Another thing that is ridiculous is that most options don't have any sort of minimum rate of return and/or inflation rate built-in before the options kick in. This is all the more evidence that they are compensation and not something given for superior performance. A 7% annual rate of return would be considered sub-standard by most, and yet in 10 years the stock price would double and the manager's options would be worth quite a lot -- for substandard performance. If the strike price were at twice the current market price, then it would be much closer to being fair. Otherwise, it's a bit like giving yourself stock options for putting someone's money into a savings account.
Finally, "If options are going to be valued using a time premium going out 4+ years, doesn't that overstate the expense in the period its incurred? Why not amortize this over that specified time period?"
Firstly, I would again say that the first question we should all ask is why are they using such a convoluted system in the first place? There must be a reason.
But further, I'm not so sure that it overstates the expense in the current period.
Management has a fiduciary duty to shareholders -- to place shareholder interests ahead of their own. Instead, they have done just the opposite.
Think about the entirety of the employee options transaction: Management ends up with a valuable company asset, and the company has nothing to show for it. To me, that means one of two things has occurred: an expense, or theft.
Did management even TRY to sell similar securities in the open market to see what they could get for them? Because that's the unseen transaction that's really occurring here. The company could have sold 10-year warrants to the public or a private investor and received cash right now (because of their time value) even if the warrants later end up worthless. That cash would have come onto the balance sheet and then be expensed out to the employees. That's what's really occurring. The company issues securities, and management gets the cash. Where is the cash the company could have received? It's all gone, right now.
Management has prevented the cash from coming on the balance sheet by giving themselves these company securities rather than selling them. Thus management also prevents the cash from being expensed on the income statement. But that certainly doesn't mean that nothing has happened. Real cash value has been tranferred from the company to management. Management simply pretends like nothing has happened, which is nonsense.
Looking at it that way really lays bare what is going on here.
Imagine if management gave itself a free 10-year option, at today's price, on a piece of company real estate. Has nothing occurred? Is that option not worth anything, as management claims? Did the company receive anything for it? Where is the cash the company could have received for it? It's all gone, right now.
Even more insulting and indicting would be if management claimed this was an "employee-only option" and not tradeable on any open market, and therefore it has no value. (An argument often used by managers about stock options). The fact that management admits that this is a sweetheart deal made available only to themselves goes all the more toward showing criminal intent. They made no effort to sell such a valuable company asset on the open market for its true worth. Instead, management makes the claim that because they gave it to themselves that means it's worthless. That's the argument that really kills me. I mean, you almost have to laugh at the bravado.
