Posted on 12/03/2008 8:36:38 AM PST by giant sable
“He’s saying that when he receives economic benefits, the company should not record an expense and he shouldn’t show that he received a benefit. That is wrong. If he received the right to buy the company’s stock for a fixed price, he received a benefit. He claims he didn’t. If he didn’t then he would not feel harmed if he gave them to me.”
He is right in a way. This is the way it was treated in tax law for a long time, as deferred compensation. Forcing a cost up front makes it more difficult to track later on. As a result, many companies just threw in the towel and STOPPED USING OPTION AWARDS FOR COMPENSATION, PERIOD.
Is that a good thing?
“These financial statements are made for the OUTSIDE investors... to protect them.”
As is typical, Govt ‘protects’ people by making up rules irregardless of whether they make sense. Simply reporting the option awards, which was done, would suffice. You dont need to make deferred compensation taxable upfront.
“When Rogers and other inside investors/employees receive free gifts, they are stealing from OUTSIDE shareholders, people who are not present to protect themselves.”
Nonsense, these are not ‘free gifts’, these are a form of worker compensation. Many of us in high tech have gotten options, some paid out, some end up worthless. The point about when to record the expense is about tax law and accounting.
“If Rogers thinks that this protection of the outside investors is too onerous, then he should go private and earn less money.”
That’s a strawman argument. The point is that by ‘over-protecting’ investors, you make it a living hell to run companies efficiently. As a result, the companies are less innovative and less able to succeed. so even the investors get a poorer return - who benefits from that? THAT is the downside of sarbanes-oxley.
PS. Our company DID go private, and there was a lot of that from 2002 to 2007, due in part to sarbanes-oxley overregulation.
“The crisis has a ways to go yet. It’s unbelievable how rotten the core of the financial system has become.”
Keep saying this stuff. Helps confirm the bottom in the market.
Atlas may need to shrug in their general direction before they get it.
>>>Yea, well, SarbOx really protected outside investors from the Cluster-&*^^ in the financial sector, now didn’t it?
I agree with your post that no guilty party in this ongoing financial mess has been hauled in under Sarbanes Oxley, but you failed to address the issue I raised: forcing public companies to expense options given to corporate insiders is good for outside stock holders, most who have no choice on the board of directors.
Much of these options have just been another form of excessive compensation, which means “theft” of stockholder money. Granting non-expensed options may work for VC funding before going public, but it is hardly fair for publicly traded companies without a fair accounting. It’s not fair because it’s not easy enough to “kick the bums out.” Change the takeover laws and I might agree with you.
>>many companies just threw in the towel and STOPPED USING OPTION AWARDS FOR COMPENSATION, PERIOD.
Is that a good thing?
Yes, if the option vested within 5 or 7 years. Awarding executives for short term performance only encourages cheating... or haven’t you noticed this.
On your point whether government should protect investors over this issue, the answer is clearly yes. Publicly traded companies are required to provide financial statements that fairly represent earnings. Think of it as a franchise. If you want to issue stocks in the U.S. you have to follow financial reporting rules designed to inform their investor. More information is good. We are currently suffering from a lack of reporting in the financial crisis (some call it “lack of transparency”).
Expensing options represents the economic cost to the stockholder. Again, if there is no cost, then I want some.
Now, in terms of the current financial debacle, I agree that the Federal Reserve (Easy Al and his replacement), Sarbanes Oxley, FASB, AICPA, rating agencies, and all the C level executives totally failed their investors. We still do not have clear reporting requirements for derivatives (they need a separate page to list them on the 10-K). Until transparency returns, one company won’t loan another company money, in fear that they have a deck full of old maids (not just one or two). How CPAs could give clean bills of health to anyone with huge derivative positions is beyond me. Hopefully we’ll see some prosecutions here.
Expensing stock options is fine if there is an expense.
If there isn’t, then the current FASB rules make no sense.
TJ’s examples are apropos, especially recently. If the options are under water right now, the tax law accounting on them is stupid. But the shareholder activists only wanted to rant about one side of the issue, showing their typical stupidity - it was never about getting the issue right. It was about what they perceived as a dilution problem.
Well, they got what they wanted. A lot of companies no longer issued dilutive stock, now they take on debt, which is senior in payment preference to stockholders. Way to go.
As a beneficiary of non-qual stock options, they’ve not been “just another form of executive compensation” — they were used to recruit talent into tech companies. There’s no way I would have given up as much of my life writing code that allows you to noodle TCP/IP connections hither and yon around the world without some pot of gold at the end of the death march.
The solution to the problem is to remove Moynihan’s “screw Silicon Valley” tax amendment from 1986 and revert to all ISO (non-expensed, pre-IPO-style) options, rather than have the bifurcated comp plans we have today of pre-IPO (ie, cap-gains treatment) and non-qualified option plans (straight W-2 income tax treatment). Then companies can issue or buy back stock to replenish a pool of stock that would be granted on a vesting schedule that would be given long term cap gains treatment, possibly with stock dividends as well. But noooo.... the IRC makes this a hideously expensive comp package for companies - not to mention an accounting target for shareholders.
The lack of compensation alternatives has already hit the US industry - you can see right now in Silicon Valley that the VC activity as well as innovation has crawled to a near stop since 2003 and the tax treatment changes.
You’re obsessed by executive comp packages, aren’t you?
Get your head around this: in the tech industries (computer as well as biotech), everyone down to secretaries were awarded stock options packages.
That’s now pretty well over and done with, and you can see that they can no longer retain the top talent. The new model is to spin up a startup, sell it for cash and quit. When younger engineers now ask me about comp packages in Silicon Valley, I tell them to go for cash on the barrelhead - now, today. And if the company isn’t willing to cough it up, then go do their own startup and issue ISO shares. When the company is acquired (they no longer bother worrying about IPO’s any more - they’re too expensive and 404 compliance simply sucks yet more money out of the company pre-IPO), they should demand CASH for the deal, not a stock swap, and they should insist that any “golden handcuff” be in CASH, not stock.
Needless to say, I hear feedback that I’m not the only one proffering this advice.
As a result, the stockholders haven’t gotten jack for gains, because they’re not getting jack for talent, and they’re not getting jack for revenue growth, or profit, or anything else for that matter. VC’s are actually returning money to investors because there is nothing for them to put it into. The number of IPO deals in the last two years in the US have been pathetic.
Executive comp packages are filled with fraud. The solution to this isn’t found in SarbOx - it is found in voting for a board of directors with balls. There is nothing in the SarbOx legislation that prevented grifters in the corner office from defrauding investors - at all. Look at the clowns at the Big Three — Ford’s CEO has nearly a megabuck spent on flying his ass back and forth between Seattle and Detroit every year - at no expense to him. Has he delivered anything that someone local to Detroit could not deliver? Nope. Where’s the Board on this issue? Rubber stamping the comp package, that’s where.
The real fault here lies with the majority shareholders who just give a blank proxy to the boards on EVERY election, EVERY ballot item, etc. While I’m hardly in the class of big-wheel investors, I used to own enough HP stock that I got called when they wanted to do the Compaq merger and they were begging for my vote. I told them why I was voting against it, and wrote to Bill H. to tell him why I was voting against it. Awhile later, I noticed that some of what I said against the deal came up when they were giving Fiorina a bum’s rush out of there - I can’t claim to be the sole source of these complaints, because they were issues that were blindingly obvious to everyone except Fiorina, one of the most over-compensated and over-feted executives of my entire lifetime. How did they get rid of her? SarbOx? No, the board stood up and grew a set and drop-kicked her plush posterior to the curb. Even then, they didn’t have the gonads to pull back the comp package and just hand her a lovely parting gift like a $50 floral bowl and say “See ya...”
No, they handed this twit $15 mil on her way out the door. For wrecking a premier company. Expensing stock options did nothing to stop that.
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