In a press release this morning, Coca-Cola announced that it will begin expensing the cost of all stock option grants beginning in the fourth quarter 2002.
Management has concluded that stock options are a form of employee compensation expense and therefore it is appropriate that these costs be reflected in our financial results. I am pleased that our company’s Board of Directors agrees,” said Doug Daft, chairman and chief executive officer.
“Our management’s determination to change to the preferred method of accounting for employee stock options ensures that our earnings will more clearly reflect economic reality when all compensation costs are recorded in the financial statements.”
Earlier this year, Berkshire Hathaway Chairman/CEO (and a Coca-Cola director) Warren Buffer had written an opinion piece urging that corporations that this approach.
If my company, Berkshire, were to give me a 10-year option on 1,000 shares of A stock at today’s market price, it would be compensating me with an asset that has a cash value of at least $20 million — an amount the company could receive today if it sold a similar option in the marketplace. Giving an employee something that alternatively could be sold for hard cash has the same consequences for a company as giving him cash.
Buffet’s commentary about options in the 1992 Berkshire Hathaway Letter to Shareholders concluded:
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 by-
product: 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.
Wow! And he said that 10 years ago.