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Expensing Stock Options - The Basics

By: Alexander Gordon

Expensing stock options refers to the inclusion of the list of stocks awarded to the expenditure document of a company. The system has its advantages and disadvantages, which will be discussed here.

The aim of expensing stock options is to increase transparency at the management level and provide equal compensation opportunities to the management. Stock options are given to top management and employees by companies in lieu of cash compensation. If you are a small business owner, chances are that you find it more convenient to offer stock options to employees instead of paying cash bonus. Since expensing stock options looks set to become a mandatory requirement from all businesses, it will be a good idea to look at the pros and cons associated with it.

Advantages of Expensing Stock Options;

1) Level Playing Field Many people feel that tax laws are tilted in favor of companies that offer stock options as compensation to its employees. Expensing stock options will close the gap between companies that pay cash and those that offer stock options to employees.

2) Transparency Expending stock options increases transparency in matters of corporate governance.

Disadvantages of Expending Stock Options;

1) Personal Ethics If the members of the companys management are unethical, expending stock options will not stop them from using illegal methods to gain an unlimited number of shares.

2) Ignoring the Stock Option Even if the stocks are put on the list of expenses, auditors have a tendency to ignore them when preparing financial statements. The entries without any visible cash impact are not taken into account. In fact, while the company treats the stock option as cashless, the employee has to pay for the stock. This actually adds to the profit margins of the company.

3) Employee Loss Since many businesses use the stock option as a way to attract talented employees, expensing stock options may lead to employees losing the stock option.

4) Level Playing Field Critics have questioned the concept of level playing field for companies paying through stock options and those paying cash bonuses. They believe that in the end, both types of payments mean a reduction in net worth of the company. If the company has to go for expensing stock options, this may hit it hard. The company ends up paying double.

Expensing stock options can generate confusion for many small business owners, and it may need time for you to learn the ropes. If you need any help in expensing stock options, you can approach a small business consultant.

Alexander Gordon is a writer for www.smallbusinessconsulting.com - The Small Business Consulting Community. Sign-up for the free success steps newsletter and get our booklet valued at $24.95 for free as a special bonus. The newsletter provides daily strategies on starting and significantly growing a business.

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