| To: Lizzie Tudor who wrote (160014) | 3/30/2004 11:29:36 PM | | From: SI Dave | of 161295 | | | Options grants are a capital event and have nothing to do with profit and loss, except at the EPS level since they represent a dilution factor. Expensing them creates a cure that could arguably be considered worse than the disease.
The fluctuating value of the options depends on their intrinsic value at any point in time relative to their vesting and expiration dates (time value), their strike price relative to the current market price of the underlying shares (intrinsic value), and volatility. The companies will take expense each time the value of the options rise (which they would if PPS rises), and take negative expense (income) each time the option value drops (which would happen of the PPS drops). Those events affect earnings, which in turn affects PPS, which in turn affects the periodic mark to market adjustment. It's a vicious circle, similar in nature to a circular argument, and just begs to be manipulated.
IMO, it's a bad idea embraced to silence critics and allow the abusive excessive options grants to executives to continue. That's is the real problem... the wholesale shifting of leveraged equity (and/or earnings) away from shareholders and over to management. The real cure is to eliminate them in favor of outright grants of shares. That way, the value of the grant is known immediately instead of being masked as a number of options with a potentially understated value, the leverage is eliminated, the dilution is significantly reduced, and insiders would be easily recognized when they try to loot and plunder the rest of the shareholders. |
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