Jtomm, I think the reason that incentive employee stock options evolved and grew over time was two-fold: they were tax writeoffs to the company and were only expensed in footnotes, so the cost of issuance was hidden to most shareholders who didn't read the footnotes. The only immediate impact was the rise in fds on the income statement, and even that was mitigated by the use of the treasury stock method.
Result? An explosion in the use of options as a way to compensate upper management. I won't argue with that....but the issue for me is the use of options as a way to expense compensation. 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?
Let's say that using options as compensation are now a bad idea given how they will be expensed. (Using Black-Scholes or other models) 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).
Ideally, I would want managers to buy stock on the open market like the rest of us, and benefit from the long-term rise in price. Options and stock grants were supposed to align shareholders' interests with those of management, but not if management is dumping this stock because it views it as part of its compensation and not an investment. I would rather that management get cash bonuses that are clearly tied to certain agreed upon operating targets (approved by shareholders, and not a compensation committee!)
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