Accounting Observer > Public Blog - Survey: Options Use Declining

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Survey: Options Use Declining

Location: Blogs AAO Weblog (Public)
Posted by: Jack Ciesielski	7/22/2005 6:56 AM
Interesting survey, courtesy of Deloitte. I haven't read it; you have to request it from the firm, and you're free to do so if you wish. The press release alone contains enough interesting nuggets for me. According to the release, Deloitte surveyed over 340 firms in technology, media, telecommunications, life sciences and other industries during 2Q05 - and came up with these conclusions: - Companies are reducing the overall options given to employees. Lower-level employees will feel the effects more than the top dogs. - Employee stock purchase plans (ESPPs) are being altered to avoid 123R compensation recognition, which will result in less benefit to the employees. [Minute lesson: ESPPs allow employees to make purchases of stock at a fixed price - and that makes them options. Often the price is at a discount to the market, sometimes as mucha as 15%, guaranteeing a quick profit for the employees. Under non-123 accounting, such an ESPP does not result in compensation. Under 123R (and 123 Classic) if an ESPP is "broad-based" and has a discount less than 5% then it won't be considered a compensation plan. Cross the 5% threshold and you're in compensatory territory; you'll have to record expense for the value of the options.] - 89% of the public companies in the survey said they're considering alternative equity-based compensation devices. - 85% of the firms that hadn't adopted 123R said they wouldn't do so until they absolutely had to. - Apparently firms may be becoming more sensitive to shareholder concerns about dilution: 74% of the surveyed firms said they intend to target potential dilution from options to 15% or less. [Still not fair. Would you be happy if you bought a car and it got 15% less miles per gallon than advertised? Or had 15% less legroom? You get the idea.] - Eight out of ten of the firms surveyed believe the move to expensing option compensation will have little effect on their stock price. Only a survey, and not necessarily indicative of the universe, certainly. Judging from the sound of it, though, firms are getting over their phobia of recording stock-based compensation. The fact that they're taking steps to manage it provides support for an old maxim: you manage what you measure. When the primary "advantage" of stock options was that they didn't have to be accounted for, they were passed out with all the thoughtful consideration of an offer of chewing gum ("Gum?" "No thanks." "Options?" "Sure, I'll take a piece!") Not so when you have to measure them. On the same subject: hats off to Microsoft, who, in their conference call yesterday, refused to supply analysts with stock-based compensation figures to back out of their earnings. In Mr. Softie's view, they consider stock-based compensation to be a true cost of business and expect analysts and investors to include such costs in their earnings modeling. A far cry from the companies who are trying to have it both ways, and the toadying analysts who are trying only to stay in the good graces of those firms. Let's hope that analysts get over their fears, just as the Deloitte survey and the Microsoft example show that some firms are getting over their own fears.

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