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Should STOCK be Expensed?

April 3, 2004

Many of the arguments that are used to support the idea of stock option expensing as compensation when options are granted to company executives and other employees depend in part on stock grants being expensed. Stock grants ARE currently expensed, but appealing to the status quo is about as weak a logical basis for an argument as might exist.

If Intel were to give all of its employees 100 shares of stock, should the company record a compensation expense?The answer to this question is that not enough information is given. In particular, are the 100 shares of stock Intel stock, or Microsoft stock?

There is no possibility of getting the right answer by a valid argument unless you understand how and why the two cases MUST be distinguished.

In either case, if the share prices were the same, the immediate benefit to the employee would be the same, neglecting tax treatment differences. This would be true even if the employees didn't know which company's stock they received.

However, in one case the shareholders suffer dilution in their proportional ownership of Intel, and in the other case they suffer a reduction in the value of the company itself as it has given up an economic asset. OTOH, a company cannot count its own shares among its economic assets.

This fact IS accepted by the FASB, and is explained by two independent arguments.

First, a company's own shares have no scarcity value to the company as it can create new ones effectively at will without significant cost.

Secondly, a company cannot own itself, as all internally held shares are actually owned by the external shareholders and whose existence is thus of no economic consequence to anyone.

No matter what argument supporters of stock and option expensing may produce, if it doesn't account for the differences between company and non-company stock, it carries no weight.

Shareholders can be diluted in their ownership, OR they can experience a loss in the value of what it is that they own, but trying to pile one loss upon the other is simply absurd.

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