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Requiring Small Businesses to Expense Stock Options
When large corporate scandals such as Enron and WorldCom were publicized in 2001, a great deal of news coverage and anger was focused on the executives of these organizations who were unaffected by their company’s demise and still reaping the benefits of extravagant stock options. Such an abuse of option compensation has lead shareholders to push for a clearer disclosure of options in financial statements. Many corporations have already moved option disclosures from footnotes and are now deducting option costs as expenses. Due to the push, the Financial Accounting Standards Board is trying to require all firms to expense their stock options. However, such a ruling to prevent corporate misuse of options will certainly prove to be detrimental to small businesses. History of Options Although stock options have recently received criticism, they are an effective form of both employee and executive compensation if used judiciously. Currently stock options allow a firm to compensate its employees without involving any financial expense, while aligning the interests of option holders and stockholders.1 In small businesses, stock options are a form of profit sharing that attract and maintain talented employees. Historically options were not included in the financial statements of firms, but instead they are simply recorded as footnotes on financial statements. The FASB sees this as a potential problem with how corporations report their financials in that it inflates profits and is proposing that all business that issue stock options are required to expense these options. Some large companies such as Amazon, Citigroup, and GM are expensing options voluntarily, but the proposal has not been received as popularly among small businesses who will be forced to pay for the misuse of options by big businesses. Current Trends in Options Stock options are no longer solely used for executive compensation; they are becoming a much larger part of employee compensation packages in small business. Firms do not only use options to recruit top talent, but also to align all employees with the success of the firm. Options are crucial to many small businesses, especially among startups and the hi-tech sector. Many of the American Electronic Association’s small companies need stock options to maintain their competitive edge and high skilled employees.2 Options are now the only major benefit that small firms are able to offer to attract high skilled workers with both pension expenses and health insurance costs skyrocketing. Small businesses continue to count on options to retain employees critical to the firm’s success because the option does not impair the firm’s profits. Proposal by the FASB Due to recent abuse of options by large corporations, the FASB has proposed a drastic change in how companies account for stock options. This change would force companies to expense all stock options at a fair value. FASB’s decision on April 22, 2003 calls for the value of the option to be determined at the date of the grant and the fair value determined by an option pricing model (e.g. Black and Scholes). [continued...] Want to know more? Download the White Paper "Requiring Small Businesses to Expense Stock Options" for just $29.95. |
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