scholarly journals Accounting For Stock Based Employee Compensation: A Continuing Controversy

2011 ◽  
Vol 3 (4) ◽  
Author(s):  
William Wrege ◽  
Mark Myring ◽  
Joe Schroeder
Keyword(s):  
Executive Compensation ◽  
Stock Options ◽  
Accounting Standards ◽  
Market Value ◽  
Stock Option ◽  
Font Size ◽  
Significant Component ◽  
Employee Compensation ◽  
Compensation Contracts ◽  
History Of

<p class="MsoBlockText" style="text-align: justify; margin: 0in 0.6in 0pt 67.5pt;"><span style="font-size: x-small;"><span style="font-family: Times New Roman;">Stock options represent an increasingly significant component of executive compensation. Theoretically, the inclusion of stock options in executive compensation contracts motivates managers to take actions that increase the market value of the firm's stock. Accounting standards regulating the treatment of stock options continue to be controversial. The focus of this paper is to examine the accounting treatment of stock options. We begin by outlining the controversial history of accounting for stock options.<span style="mso-spacerun: yes;">&nbsp; </span>Next, we examine the alternative accounting treatments for stock option.<span style="mso-spacerun: yes;">&nbsp; </span>Finally, we critique the proposed changes to the methods of accounting for stock options.<strong style="mso-bidi-font-weight: normal;"></strong></span></span></p>

Determinants of CEO Pay: A Comparison of ExecuComp and Non-ExecuComp Firms

2010 ◽  
Vol 85 (5) ◽  
pp. 1511-1543 ◽  
Author(s):  
Brian Cadman ◽  
Sandy Klasa ◽  
Steve Matsunaga
Keyword(s):  
Executive Compensation ◽  
Stock Returns ◽  
Institutional Ownership ◽  
Stock Option ◽  
Ownership Concentration ◽  
Positive Relation ◽  
Stock Liquidity ◽  
Compensation Contracts ◽  
Cash Compensation ◽  
Ceo Pay

ABSTRACT: We document that firms included in the ExecuComp database tend to be larger, more complex, followed by more analysts, have greater stock liquidity levels, and have higher total, but less concentrated, institutional ownership than other firms. Based on these differences, we test and find support for three predictions. First, ExecuComp firms rely more heavily on earnings and stock returns in determining CEO cash compensation. Second, the weight on earnings is more sensitive to differences in the extent of growth opportunities for ExecuComp firms. Third, the positive relation between institutional ownership concentration and the value of stock option grants is stronger for ExecuComp firms. Overall, our results suggest that ExecuComp and non-ExecuComp firms operate in different contracting environments that lead to differences in the design of their executive compensation contracts. As a result, care should be taken in extending results based on ExecuComp samples to non-ExecuComp firms.

On the Progress of Option-Regulating Legislation

2004 ◽  
Vol 2 (1) ◽  
pp. 75-83
Author(s):  
Wan-Kyu Park ◽  
Toni Smith
Keyword(s):  
Stock Options ◽  
Stock Option ◽  
Capital Gains ◽  
Financial Accounting ◽  
Economic Conditions ◽  
Tax Law ◽  
Legislative History ◽  
The Past ◽  
History Of ◽  
Tax Status

A great deal of debate currently surrounds stock-option-based compensation. Its many facets involve preferential tax treatment, the alternative minimum tax, and financial accounting procedures. The issue involves many; options affect an estimated 10 million people and 20–25 percent of all publicly held U.S. firms. Compensatory stock options were originally incorporated into the Internal Revenue Code in 1950 with the addition of Section 130A. At that time, the incentive effects of this form of compensation were deemed worthy of preferential tax status. In the 1950s, gains associated with tax-preferenced options were taxed at the lower, 25 percent, capital gains rate instead of the 91 percent applied to ordinary income. While stock option provisions have been revised and continue to be the topic of legislative discussion, they remain a part of tax law. This paper traces the legislative history of the special tax status of compensatory stock options and highlights the congressional intent and economic conditions surrounding the revisions made over the past 50 years.

scholarly journals Accounting for Stock Options

2005 ◽  
Vol 19 (4) ◽  
pp. 115-134 ◽  
Author(s):  
Jeremy Bulow ◽  
John B Shoven
Keyword(s):  
Stock Options ◽  
Accounting Standards ◽  
Financial Statements ◽  
Financial Accounting ◽  
Financial Statement ◽  
Financial Accounting Standards Board ◽  
Public Companies ◽  
Valuation Method ◽  
History Of ◽  
Reported Earnings

As public companies begin their new fiscal years, they are implementing a new and controversial Financial Accounting Standards Board (FASB, 2004) proposal for expensing stock options. Applied to 2003 and 2004, this rule would have slashed reported earnings of the Standard & Poor's 500 by 8.6 and 7.4 percent; the effect in the bubble years would have been more than twice as large. We describe the history of how these options have been expensed for financial statement purposes. We assess the new FASB approach and find that it is deeply flawed. The main purpose of the paper is to describe an alternative options expense valuation method, the Bulow-Shoven approach, that addresses these problems. Our approach is simpler than the new FASB methodology, less prone to earnings manipulation and more consistent with the way the rest of compensation is treated in financial statements.

Will I Get Paid? Employee Stock Options and Mergers and Acquisitions

2020 ◽  
pp. 1-36
Author(s):  
Ilona Babenko ◽  
Fangfang Du ◽  
Yuri Tserlukevich
Keyword(s):  
Mergers And Acquisitions ◽  
Firm Value ◽  
Stock Options ◽  
Merger And Acquisition ◽  
Employee Stock Options ◽  
Negative Effects ◽  
Employee Compensation ◽  
Compensation Contracts ◽  
Unique Data ◽  
Target Firms

We analyze how employee compensation contracts of target firms affect merger terms and outcomes. Using unique data from merger agreements, we document that in 80.0% of all merger and acquisition (M&A) deals, at least some of the target’s employee stock options (ESOs) are canceled by the acquirer and not replaced by new equity-based grants. Contract modifications reduce the value of ESOs by 38.4% in the average M&A deal. Further, the combined merger returns are larger when employees experience greater losses. Overall, our results indicate that the benefits of reducing the number of ESOs outweigh the potential negative effects on firm value.

Insider Holding Requirements, Stock Options, and Stock Appreciation Rights

2001 ◽  
Vol 16 (3) ◽  
pp. 227-248 ◽  
Author(s):  
Steven Balsam ◽  
Wonsun Paek
Keyword(s):  
Executive Compensation ◽  
Stock Options ◽  
Significant Interaction ◽  
Securities And Exchange Commission ◽  
Employee Stock Options ◽  
Significant Interaction Effect ◽  
Compensation Contracts ◽  
Book Value ◽  
Rule Change ◽  
Compensation Methods

This study examines how a Securities and Exchange Commission rule change affected the design of executive compensation contracts. It shows that a change in insider holding requirements for employee stock options led to a widespread decrease in the use of stock appreciation rights. Further, we find firms that decrease their use of stock appreciation rights compensate employees by increasing their use of employee stock options. The Securities and Exchange Commission rule change provides a unique opportunity to examine the use of compensation methods as it caused firms to examine their policies and make an active decision to modify their practices. Cross-sectionally, we find the likelihood a firm decreases its use of stock appreciation rights positively associated with the magnitude of expense associated with stock appreciation rights, the firm's use of income-increasing accounting methods, leverage, and the ratio of market to book value of assets. We also find a significant interaction effect for the magnitude of expense when interacted with profitability.

scholarly journals Accounting For Stock Options: A Historical Perspective

2011 ◽  
Vol 1 (5) ◽  
Author(s):  
Paul J. Carruth
Keyword(s):  
Executive Compensation ◽  
Historical Development ◽  
Stock Options ◽  
Historical Perspective ◽  
Effective Means ◽  
Fair Value ◽  
Font Size ◽  
Reporting Requirements ◽  
Income Statement

<p class="MsoNormal" style="text-align: justify; margin: 0in 40.5pt 0pt 0.5in;"><span style="font-size: x-small;"><span style="font-family: Times New Roman;">In recent years stock options have become one of the most dominant and controversial forms of executive compensation.<span style="mso-spacerun: yes;">&nbsp; </span>Stock options are controversial not only because of the sheer magnitude of some executive option grants, but also because of the method used to account for them.<span style="mso-spacerun: yes;">&nbsp; </span>Currently, the fair value of stock options does not have to be reported as compensation expense on the income statement.<span style="mso-spacerun: yes;">&nbsp; </span>Critics maintain this approach results in an inflated and misleading amount of reported net earnings.<span style="mso-spacerun: yes;">&nbsp; </span>This paper addresses the role of stock options as an effective means of employee compensation and traces the historical development of the accounting treatment of stock options.<span style="mso-spacerun: yes;">&nbsp; </span>In addition, the current reporting requirements for options are discussed along with recommendations for improving the manner in which stock options are accounted<span style="mso-spacerun: yes;">&nbsp; </span>for.<span style="mso-spacerun: yes;">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span></span></span></p>

scholarly journals Diluted Earnings Per Share Overstatement Bias: Including Unrecognized Employee Compensation In Proceeds From Assumed Exercise Of Employee Stock Options Under The Treasury Stock Method

2013 ◽  
Vol 29 (6) ◽  
pp. 1657
Author(s):  
David T. Doran
Keyword(s):  
Financial Reporting ◽  
Stock Price ◽  
Stock Options ◽  
Fair Value ◽  
Stock Option ◽  
Employee Stock Options ◽  
Employee Compensation ◽  
Earnings Per Share ◽  
Service Period ◽  
Free Environment

Generally accepted accounting principles (GAAP) require firms to recognize compensation expense under the fair value method in the case of employee stock options. Straight line amortization of the options grant date fair value must be recognized as expense over the service period which decreases the earnings per share numerator. For diluted earnings per share (EPS), GAAP requires using the treasury stock method, where proceeds from assumed stock option exercise is used to purchase treasury shares at the average for the period price. Exercise proceeds include the exercise price plus unrecognized future employee compensation. For profitable firms, exercise is assumed if dilutive - more shares are assumed issued than are reacquired for the treasury which increases the diluted EPS denominator. These requirements are consistent across US GAAP and International Financial Reporting Standards. This paper tests whether including unrecognized employee compensation in proceeds from the assumed exercise of employee stock options under the treasury stock method is appropriate. A simple multi period model that assumes a risk free environment with complete certainty is applied. This study contributes to the literature by demonstrating that future unrecognized employee compensation should not be included in proceeds from the assumed exercise of stock options under the treasury stock method. Doing so consistently causes diluted EPS overstatement, and in certain instances causes assumed exercise of in the money options to be antidilutive, which results in complete exclusion from the diluted EPS calculation. This research extends the employee stock option work of Doran (2005 and 2008) that found: 1) Compensation expense recognized over the employee service period should equal the periodic annuity amount that provides the options grant date fair value, and 2) Treasury shares should be assumed purchased at the higher end of period stock price.

scholarly journals The Implications Of Expensing Stock Options On Corporate Governance

2011 ◽  
Vol 5 (9) ◽  
Author(s):  
Vinita Ramaswamy ◽  
C. Joe Ueng
Keyword(s):  
Corporate Governance ◽  
Executive Compensation ◽  
Stock Options ◽  
Principal Agent ◽  
Employee Stock Options ◽  
Font Size ◽  
Income Statement ◽  
Principal Agent Problem

<p class="MsoNormal" style="text-align: justify; margin: 0in 34.2pt 0pt 0.5in; mso-pagination: none; mso-layout-grid-align: none; punctuation-wrap: simple;"><span style="font-size: 10pt; mso-bidi-font-style: italic;"><span style="font-family: Times New Roman;">This paper examines the roots of the abuse of stock options, finding it centered on a principal/agent problem that arises when employee stock options are not required to be expensed in the income statement.<span style="mso-spacerun: yes;">&nbsp; </span>The failure of corporate governance, including the proper oversight of executive compensation, and the failure of FASB to require expensing stock options, leads to a management-centric organization whose motives diverge from the interests of shareholders.</span></span></p>

scholarly journals Employee Stock Options And Diluted Earnings Per Share: An Extension

2011 ◽  
Vol 7 (2) ◽  
Author(s):  
David T. Doran
Keyword(s):  
Stock Options ◽  
Market Price ◽  
Accounting Standards ◽  
Fair Value ◽  
Employee Stock Options ◽  
Employee Compensation ◽  
Earnings Per Share ◽  
Service Period ◽  
The Impact ◽  
Period Model

Firms must currently apply the fair value method in determining the amount of employee compensation incurred in the case of employee stock options. The amount of such compensation is required to be measured as fair value of the equity instrument at the grant date, with compensation expense recognized over the service period under the straight-line method. This compensation expense affects the numerator for purposes of calculating earnings per share (EPS) under generally accepted accounting principles (GAAP). Current GAAP also requires that for purposes of calculating diluted EPS, the treasury stock method be applied where the assumed proceeds from exercise of the optioned shares is used to purchase shares of the firms stock at its average market price of the earnings period. These incremental shares increase the denominator for purposes of calculating diluted EPS. These requirements are consistent across the pronouncements of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). This study extends the work of Doran (2005) where a single period model was assumed and found: 1. Application of the fair value method does not double count the impact of compensation recognized, and 2. Applying the treasury stock method where shares are assumed purchased at the average for the period price (instead of end of year price) understates the number of incremental shares (the denominator), which overstates diluted EPS. This paper employs a simple multi period model that assumes a risk free environment with complete certainty in testing the accuracy of GAAP compliant diluted EPS in the case of employee stock options. Consistent with Doran (2005) the results here again indicate that assuming purchase of treasury shares at their average market price of the earnings period understates the EPS denominator. The results of this study also indicate that the reported employee compensation expense is understated. The observed cause of this numerator error is treating the payment for the option (employee service) as if it was received in full at the grant date - as a lump sum (like inventory or some other asset), rather than being received ratably over the employee service period as an annuity. Each of these findings contributes to the observed overstatement of diluted EPS. Correct diluted EPS is observed when the employee service is treated as being received ratably over the service period, and the shares assumed purchased as treasury stock are acquired at the higher period ending market price. The amount of diluted EPS overstatement under both FASB and IASB standards is directly related to the length of the term of the option.

Investor Sentiment and Stock Option Vesting Terms

2021 ◽  
Author(s):  
Shawn X. Huang ◽  
Sami Keskek ◽  
Juan Manuel Sanchez
Keyword(s):  
Mergers And Acquisitions ◽  
Stock Options ◽  
Investor Sentiment ◽  
Stock Option ◽  
Capital Expenditures ◽  
Short Term ◽  
Compensation Contracts ◽  
Theoretical Predictions ◽  
One Year

Using the details of vesting terms, we document that stock options granted in high-investor-sentiment periods tend to have shorter vesting periods and durations and are more likely to vest completely or have a significantly larger fraction vested within one year of the grant date, relative to low-sentiment periods. We further find that the sentiment effect on vesting terms is more pronounced when firms are largely held by investors with short investment horizons (e.g., transient institutions). Moreover, short vesting terms in high-sentiment periods are positively associated with future mergers-and-acquisitions activity and capital expenditures. Overall, our findings are consistent with theoretical predictions that, in a speculative market, shareholders incentivize managers with short-term-oriented compensation contracts to induce managers to pursue actions maintaining overvaluation. This paper was accepted by Shiva Rajgopal, accounting.

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