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Taking Stock

Minimize the costs of new stock-option expensing rules.
Magazine Contributor
2 min read

This story appears in the June 2005 issue of Entrepreneur. Subscribe »

As companies gear up for the hotly contested rule requiring U.S. firms to expense stock options, there are several ways they can soften the blow to their balance sheets.

Last December, the Financial Accounting Standards Board adopted a rule forcing companies to account for the value of employee stock options from corporate income; it takes effect in June for public companies and in December for private firms. The rule--aimed at shedding light on how employee stock options affect earnings--met especially fierce opposition from the technology sector, which ardently uses stock options to recruit top talent.

Now that the debate is over, companies are looking at ways to cut options expenses. To that end, many are expected to adjust volatility estimates, or the likelihood the stock will undergo price changes, downward. "It's not necessarily a self-serving thing they're doing," explains Corey Rosen, executive director of the National Center for Employee Ownership in Oakland, California. He says it's a valid consideration for companies given that stock performance is more stable today than in 2000, for instance.

"In the past, nobody spent a lot of time trying to accurately calculate how their options would be used because it didn't matter," Rosen says. "Now it matters a lot, and companies are going to try to be more precise about it."

Another potential strategy is to cut the duration of an option. "In the past, companies said, 'Oh, we'll give everybody 10-year options,' because they didn't worry about accounting," Rosen says. "Now, companies are wondering if 10 years is really the right number of years."

While changing vesting schedules can also trim options costs, companies should proceed with caution, Rosen warns. "Changing the vesting from three years to, say, five years will have an effect. While you may see some companies do that, [it's] going to be something companies think hard about," he says, "How much are they willing to give up of the purpose for which these options are being granted so they can make their expense reports look better?"

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