NCPA - National Center for Policy Analysis

What Do Stock Options Cost Companies?

August 8, 2002

In the debate over the nature of stock options and whether corporations should count them as an expense, the case is often made that options are a real value and they impose a real cost on companies. But there is not universal agreement on this point.

Some experts contend that while stock options hold value for the fortunate executive who is awarded them, they cost the corporation nothing and should not be recorded as a cost on its income statement.

Here is how the reasoning goes:

  • The value inherent in a stock option, when exercised, is value taken from other shareholders -- without that value flowing through the company's books.
  • In trying to understand the performance of a company, assess its prospects and estimate its value, people use a number of different measures -- including net income and earnings per share.
  • When it comes to options, net income has no relevence or impact -- but earnings per share does reflect the value of options and does so accurately and completely.
  • As the number of shares of a company grows through the exercise of options, earnings per share fall -- not because earnings are lower, but because the number of shares is higher.

Source: Harvey Golub (Dow Jones board member), "The Real Value of Options," Wall Street Journal, August 8, 2002.


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