ACCOUNTING FOR STOCK OPTIONS

For many years, stock options provided companies with a key tool used to reward employees and executives. Beginning in the 1980s, stock options became an increasingly popular way for companies to tie corporate performance to compensation for chief executives and key managers. This trend reached its peak in the 1990s, but with scandals at Enron and other companies, stock options have come under increased scrutiny. Over the past half century, the professional manager has emerged as the chief executive in many large firms. Unlike the firm's original founders, these executives often own only a very small percentage of the company's outstanding stock. This can create the potential for a conflict of interest between the executives maximizing their own individual benefit and the outside owners wanting the company's value maximized. The use of stock options is usually reserved for decision makers in the company, with lower-level employees offered stock purchase programs (if any stock benefit). This research examines stock options, recent events at the FASB that have changed how companies account for their options, and the consequences of those changes to the business and investment community.

Stock options are essentially the right to purchase stock at some specified date in the future at an agreed-upon price. This price is not related to the price the stock is being traded at either at the time of

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yet to demonstrate to stockholders that they have a personal interest in the company, some executives have worked with compensation committees to create stock-for-stock exercise programs in order to exercise new stock options. Under these programs, the executive uses old shares to exercise new options. In the above example, the CEO may exercise the option of the $15 shares and purchase 1,000 shares of stock. Later, the CEO may be granted a new option at $20 per share, but this time for 1,500 shares. The CEO may elect to exercise the option by selling his current holdings. In this way, the executive is able to avoid using personal funds to exercise the option, leaving those funds available for other investments. A variation on this strategy can also be used to accumulate additional shares in the company without using personal funds. Under this scenario, the executive sells only the number of shares required to finance exercising the new options (Aisenbrey & Bickford 44). Another way in which stock options can be exercised so that the executive does not have to use his own funds but can still retain some of the option is through the "immaculate exercise" (Zesk 80). Under this exercise, the executive exercises the option an

Category: Business - A