ESOPs or Employee Stock Options are a modern instruments of incentivising employees by corporations or companies. But as we move forward, ESOPs are becoming controversial regarding their usage both from the point of shareholders as well as employees.
Firstly, ESOPs straightaway dilute the equity of the company, thus hampering shareholders' interests. Nobody likes to see his stake being diluted.
Secondly, as a motivational instrument too, ESOPs are becoming controversial. If an employee is issued ESOPs, then the benefit that employee will have from ESOPs will be reliant on the overall performance of the company and that'll come from the collective performances of all the employees or co-workers. Why should an employee's special efforts be put ransom to the efforts of other employees? In a way, ESOPs are unfair to employees too. Rather, they should be compensated straightaway in form of salary raises, bonuses, perks or incentives. So, ESOPs fail this purpose too.
Thirdly, the expense on ESOPs are not accounted in the expense sheet, thus inflating profits and artificial stock price increases.
Thus, budding investors must be wary of ESOPs and must ask the management regarding its true utility.
Shareholders should understand that companies incur costs when they deliver something of value to another party and not just when cash changes hands. It is both silly and cynical to say that an important item of cost should not be recognized simply because it can't be quantified with pinpoint precision.
ReplyDeleteMoreover, options are just not that difficult to value. Admittedly, the difficulty is increased by the fact that the options given to executives are restricted in various ways. These restrictions affect value. They do not, however, eliminate it. In fact, since I'm in the mood for offers, I'll make one to any executive who is granted a restricted option, even though it may be out of the money: On the day of issue, Berkshire will pay him or her a substantial sum for the right to any future gain he or she realizes on the option. So if you find a CEO who says his newly issued options have little or no value, tell him to try us out. In truth, we have far more confidence in our ability to determine an appropriate price to pay for an option than we have in our ability to determine the proper depreciation rate for our corporate jet.
It seems to me that the realities of stock options can be summarized quite simply: If options aren't a form of compensation,what are they? If compensation isn't an expense, what is it? And, if expenses shouldn't go into the calculation of earnings, where in the world should they go?
The accounting profession and the SEC should be shamed by the fact that they have long let themselves be muscled by business executives on the option-accounting issue. Additionally, the lobbying that executives engage in may have an unfortunate byproduct: In my opinion, the business elite risks losing its credibility on issues of significance to society - about which it may have much of value to say - when it advocates the incredible on issues of significance to itself.
- Warren Buffett, Letter to shereholders 1992
When Berkshire acquires an option-issuing company, we promptly substitute a cash compensation plan having an economic value equivalent to that of the previous option plan. The acquiree's true
ReplyDeletecompensation cost is thereby brought out of the closet and charged, as it should be, against earnings.
- Warren Buffett, Letter to shereholders 1997