Companies Expensing Options Voluntarily Suffer Mild Earnings Hit

August 9, 2002 ( - The 43 companies, which have already pledged to expense employee stock options, would suffer only a 4.2% hit to earnings if they had started doing the expensing in 2001, an analysis has found.

The USA TODAY study said the figure for those firms already stepping up to the plate is far less painful than the 20% earnings reduction that Standard & Poor’s 500 companies would suffer by expensing options — as estimated by Bear Stearns research.

Although the parade of companies voluntarily moving to option expensing has helped to somewhat ease the protests over corporate wrongdoing involving options, the newspaper said the companies in most cases don’t use many options to begin with.

On the other hand, executives who stand to have the biggest earnings impact have mostly refused to play along so far, the newspaper said.

For example, Intel and Cisco said they would continue not subtracting the cost of options from earnings. Intel’s earnings last year would have been 79% lower if it had expensed stock options, and Cisco’s loss would have been nearly three times as large, the newspaper said.

Perhaps more than in any other segment of the economy, there was an options bonanza among technology companies who used the options to compensate workers at all levels.

Contrast Intel and Cisco with the “me too” firms who joined the voluntary options expensing line.

General Electric’s earnings would have been 2.9% lower in 2001 had it expensed options.

Realty Income, a real estate investment trust, would have seen a 0.5% drop, USA TODAY said.

Options give the right to buy a set number of shares of stock at a set price – typically the market price at the time of issue – two or three years out. Most companies list options only in the footnotes of their financial filings and not on the income statement.