Volume 10, Nos. 8 & 9

 

2000 Stock Compensation: Sizing Up The Beast:  Observers of the financial scene have been inundated for years with articles about the evils of stock options: how they are a violation of the trust between management and shareholders, how the accounting for them is unrealistic, and how (someday) the chickens will come home to roost. Those Cassandra cries are sounding ever more shrill as companies trundle into a downturn, making options usage even more egregious. An examination of the stock compensation disclosures of the S&P 500 companies for 2000 shows that the vast majority of the firms are shameless in their disregard for the forthright reporting of the economic facts of life: employees will work only when you pay them what they want. What they want is compensation denominated in stock options. Every company following U.S. generally accepted accounting principles has the same opportunity to take the high road and report the cost of what it takes to "attract and retain capable management and employees," as the mantra goes. Yet the 2000 data shows that the vast majority of companies granting stock options don't merely choose the low road; they roll around in the mud on the low road, too. This report sheds light on issues that superficial earnings analysis misses: option grants, the tax effects of exercises, the potential for repricing options, the correlation of options to stock performance, and of course, the compensation expense ignored by conventional accounting. Size of the beast? Think of King Kong - swilling cocktails laced with Ape Growth Hormone.

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