Volume 17, No. 8

 

S&P 500 Stock Compensation: Who Needs Options?  It’s not the addiction it used to be. Issuing stock options as a way of rewarding employees is not as prevalent as it once was, and restricted stock compensation has moved to the forefront. When stock option issuance was at its most popular, financial reporting was seriously incomplete because the faulty accounting for stock options did not show investors all the costs of production - and at the companies where options usage was heaviest, costs were the most understated.

The required application of Statement 123(R) in 2006 changed that: it put options on the same level accounting playing field as cash and restricted stock awards. No more "stealth compensation." While many pundits expected investors to be turned off by sudden recognition of stock option compensation, the S&P index advanced almost 14% in 2006 - and the earnings of the S&P increased over 21%, despite new recognized costs. The sky didn’t fall in 2006.

The sky did fall in 2007 - but it wasn’t because of stock option accounting. Though companies now have to account for all manner of compensation, they still don’t always seem to take shareholders into consideration. This report examines trends in stock compensation for both restricted stock and options in the S&P 500.

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