My limited knowledge of NQSO accounting was based on my experience at a startup company 10 years ago. I was wrong when I said that NQSO's can't be granted to directors. Option grants with strike prices below market value are refered to as NQSO's because many favorable tax consequences to corporations and to employees are NOT AVAILABLE for NQSO grants as opposed to ISO (incentive stock option) grants.
The below-market option grants to CFO Rivet and others are common throughout the industry. I personally would much rather see Rivet earning $200,000 plus getting $75,000 of (effectively) free stock, than see him earning $275,000.
note, EE=employee, ER=company Slide 30, 31: Tax benefits for income tax purposes, EE stock options are classified as incentive stock options (ISO) or nonqualified stock options (NQSO) with respect to the EE: no tax consequences when options are granted for ISOs, taxes are due when shares acquired upon exercise of options are sold for NQSOs, taxes are due when options are exercised COMMENT - which probably means that most will not exercise until they are about to expire with respect to ER: there are no tax deductions for ISOs for NQSOs, deduction [for taxes] is allowed when options exercised COMMENT - because, effectively, the NQSO grants are just another form of employee compensation deduction = MV of shares - cash paid by EE
Finally, here's how stock options effect the earnings statement: Earnings management flexibility in GAAP permits firms to exclude the value of options granted from net income if excluded from the income statement, the value of options granted must be disclosed in footnotes
OK, so lets see what AMD said w.r.t. options in its latest 10Q for Q2 (page 6):
3. Stock-Based Incentive Compensation Plans
The Company uses the intrinsic value method to account for stock options issued to its employees under its stock option plans and amortizes deferred compensation, if any, over the vesting period of the options. Compensation expense resulting from the issuance of fixed term stock option awards is measured as the difference between the exercise price of the option and the fair market value of the underlying share of company stock subject to the option on the award’s grant date. For purposes of pro forma disclosures, the Company estimates the fair value of its stock-based awards to employees using a Black-Scholes option pricing model.
The highlighted sentence says it all -- AMD records NQSO options as deferred compensation expenses, which means they affect earnings, not just taxes over the period that the option is exercisable, probably ten years. This means that AMD is recording compensation expense for Bob Rivet for any below-market option grants he might have received in 1994, 1995, 1996, ..., 2003.
How significant are NQSO's at AMD?
Overall, not very significant. The 2000 ISO plan limits below market grants to 11% of the total.
W. J. Sanders III and Hector de J. Ruiz have ZERO unexercised in-the-money options. Herb has $30,000 worth, Rivet $77,100, Siegle $141,660 and McCoy $15,000. These amounts are about equal to the Yahoo exercises the started this whole topic. Big whoopity! Thats all, folks.
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