How to Get Out of the Stock Options Quagmire

E-mail Story Print Story

It seems to me that the NSO model has become obsolete. Changes in the tax law, which capped executive compensation deductibility at $1 million, spawned this mess. As creative lawyers (and accountants) tried to devise a tax-favorable workaround, we wound up with this quagmire of unintended consequences—the fraudulent behavior called “backdating.” It also created an accounting nightmare that is costly to companies and not terribly accurate reporting, no matter the sophistication of the models developed to try to measure the “compensation expense” that needs to be recorded.

If I were in the decision-making chair of a public company, I would scrap any NSO plan I had and replace it with a restricted stock grant program. The goal of retaining key employees with appropriate compensation (the so-called reason for stock options) certainly can be achieved by following this path. However, the accounting is much simpler: cost of stock at date of grant is compensation expense; the employee cannot touch the stock until it vests; the basis to the employee is the price at date of grant; ordinary income is recognized when the stock vests; and any appreciation from date of grant is capital gain at (currently) favorable rates.

Alexander H. Beard, Jr., CPA (Retired)
New York, N.Y.

©2008 The New York State Society of CPAs. Legal Notices