Human Capital & Careers

Expensing Options: Better Now Than Later

Study claims many companies will be hurt by waiting for FASB to act. Plus: why don't CFOs mentor?
Lisa YoonJune 27, 2003

If you can’t beat ’em, expense ’em.

That’s probably good advice for the anti-options-expensing set. In the days of FAS 123, when stock-options expensing was optional, companies and accounting experts engaged in vociferous debates over whether to expense or not to expense. But with the Financial Accounting Standards Board shooting for 2004 as the kick-in for mandatory stock-options expensing, the debate gets closer to becoming moot.

And according to a new study by human-resources consultancy Buck Consultants, corporates will voluntarily start expensing now instead of waiting for the new FAS — if they know what’s good for them.

Of course, what’s not good for them is a decrease in earnings per share (EPS). And according to the study (“Options Expensing: By Choice or Mandate? A Critical Question of Timing for High-Tech Companies”) tech companies that wait until someone makes them adopt stock-option expensing will face a big drop in EPS. How big? A whopping 20 times more than companies that voluntarily expense options now.

What gives? Retroactive accounting. Under the new rule proposed last December, FASB removed the prospective accounting method for options, explains Ted Buyniski, a principal in Buck’s compensation practice and co-author of the study.

That means once the rule kicks in, not only will companies be required to expense options, but they will also have to record the expenses going back to the time unvested options were granted.

Since stock prices were decidedly higher a few years ago, options granted, say, three years ago have fairly high Black-Sholes values. Take those values and multiply by the number of yet-to-be-vested options, and you’re looking at a big bite out of earnings, according to the Buck study.

By contrast, those who choose to expense now merely have to accrue expenses based on current value (or, the year of adopting options expensing). Expensing past grants is not required — yet. If the current price is a victim of the down market, expensing should be a lot easier on earnings.

There is a catch to early adoption, however. “If you adopt now, you may be expensing for a year longer than if you wait,” says Buyniski. Apparently for some companies, this consequence is far more desirable than taking a massive hit to earnings.

As recently as a few months ago, “wait-and-see” seemed the best strategy in options accounting. Back then, it was largely a question of “what if” FASB mandates expensing, says Buyniski. Now that the question has turned to “when, not if,” companies should get started now in order to avoid the potentially devastating effects of retro expensing.

There is one caveat to the advice, however. Congress is currently considering a bill that would impose a three-year freeze on any changes to the current accounting rules governing stock option grants. As of now, it’s unclear whether that bill has a realistic chance of passing.

Still, Buyniski says companies should be addressing options bookkeeping right now. “Whether a company agrees with stock option expensing or not, it is critically important for it to come to an immediate understanding of the impact it will have on their 2003 financials.”

The Mentoring Gap

Career experts often advise enlisting a mentor to help with the climb up the executive ladder. Finance executives, however, have never been big on mentoring. Really, how many CFOs do you know who attained the top finance job with the guidance of a sage veteran CFO?

Besides, now is not exactly the best time to talk to CFOs about taking underlings under a kindly wing — what with Sarbanes-Oxley and the lot. “Ask CFOs to mentor and they’ll say, ‘Yeah, I’ll do that in the two seconds I have to breathe,’” says career-management consultant Tom Casey.

And yet, it seems many finance managers wish they had a good mentor. Casey, a principal at Buck Consultants, says that by Buck’s data 60 percent of finance managers would be willing to leave their current employer to follow a mentor. But with mentor programs a rarity, it’s up to those looking for mentorship to seek it out for themselves. For senior finance managers craving wisdom from one who’s been there, here are some pointers.

Be mentor-worthy. According to Casey, the people most likely to receive mentorship are those who have already demonstrated outstanding performance. So if you want a mentor, start by making yourself known as a high performer.

Have a plan. Like everything else in career management, entering a mentoring relationship requires some forethought on the part of the one seeking mentorship. Think about what you expect to get out of the relationship: What is your goal? Also assess when, where, and how much time you’d like to spend with your mentor.

Be promiscuous. Mentoring in finance has a different meaning from mentoring in other fields — so does the use of the word promiscuous. “We’re not looking for Yoda here,” says Casey. Instead, mentors should come in a series of short flings for specific purposes (for instance, understanding the tax code). Once you’ve gotten a handle on the area, move on to the next mentor.

Show appreciation. And that doesn’t just mean thanking your mentor, says Casey. If your mentor was helpful, return the favor by spreading the word. Even mentors appreciate a boost in their reputations.

As for employers, Casey has a few sage words for them as well. He says few companies have successful mentoring programs, and this is unfortunate. He notes that many employees are not happy with their employers and “are just biding time to move when the economy improves.” As many an HR consultant before him has said, companies should take measures to retain workers before the job market picks up.

CFOs on the Move

  • Delta Air Lines Inc. CFO M. Michele Burns has been elected to the board of directors of Wal-Mart Stores Inc. Burns joined Delta Air Lines in 1999 as vice president of corporate taxes. She was promoted to senior vice president of finance and treasurer in January 2000. She has been in her current position since August 2000. Burns also serves on the boards for Orbitz Inc., Worldspan LP, the Ivan Allen Co., the Atlanta Symphony Orchestra, and the Elton John AIDS Foundation, where she serves as treasurer.
  • Hofler Milam was named VP of finance at Duke University. Currently VP, COO, and CFO of health-maintenance organization QualChoice of North Carolina. Before that he was assistant dean for planning and resource management at the Wake Forest University School of Medicine before joining QualChoice. Milam succeeds Michael Mandl, who is leaving to become executive VP of finance and administration at Emory University.
  • And finally: With so many finance chiefs going to jail or pleading guilty to fraud charges these days, it’s refreshing to see one actually proven innocent. Two years ago, Dale Gibbons made headlines when he resigned from his job as Zions Bancorporation CFO, claiming stress due to an investigation into drug charges.

Gibbons was accused of having nine-tenths of a gram of methamphetamine and making pornography accessible to a minor, his daughter. He denied that the drug belonged to him. As for the porn, Gibbons testified that he had it in his bedroom but his daughter respected his rules on privacy and couldn’t have seen it. Police said Gibbons’s daughter said her father’s pornography sometimes was accessible to her, according to the Las Vegas Review Journal. Gibbons agreed to attend meth withdrawal treatment.

The prosecution claimed Gibbons led a double life. At the time of the investigation, various newspaper reports depicted a respectable banker by day; drug-taking, rave-party host to leather-bikini-clad young women by night.

Apparently things have quieted down significantly. Last year Gibbons was found innocent. This month, he was appointed CFO of Western Alliance Bancorporation. Although he told the Review Journal he wants to move on with his life, he’s not moving on completely. In a suit against Salt Lake City police and prosecutors on defamation charges, Gibbons is seeking $6 million in salary, compensation, and benefits plus punitive damages, according to the newspaper.