Specialist suggests plan for expensing Coke options ATLANTA (WABE) - The Coca-Cola Co. (NYSE: KO) hit a public relations home run July 13 when it announced that henceforth it would be expensing options paid to its executives. There may be a better way for them to expense options than the way they are planning, said an executive compensation specialist.
Beginning in the fourth quarter, the company will take the amount of stock options it gives to executives as part of employment packages and apply it to the company's bottom line as the options vest. It will cost about 1 cent per share, assuming the same amount of options are granted this year as last year.
Here's how it works now.
A company can pay an executive up to $1 million in cash but it has to expense take off the bottom line anything over that amount. By paying the executive in stock options, it doesn't have to take anything off the bottom line.
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, said Coke CEO Douglas Daft in a prepared statement.
Just how does it plan to do that?
Coke will ask two Wall Street firms to provide binding quotes on options to buy 10,000 shares of Coke stock and options to sell 10,000 shares. The average of the four quotes would be used to determine the options' value, and thus the charge to earnings, according to published reports.
Here's the argument for that method: Having outsiders provide the quotes will ensure fair numbers and conceivably spare Coke criticism that it was using creative methods to come up with numbers it liked.
Coke stepped up to the plate, and said, We're going to expense options because it's the fair and the right thing to do for our shareholders,' said Joe Goodwin, president of the Goodwin Group, an Atlanta-based executive recruiting and board consulting practice.
Coca-Cola deserves credit for making its statement, but there is a better way to expense options, Goodwin said.
He said the spread, or the actual loss to the company, should be expensed.
Let's use Robert Nardelli, CEO at The Home Depot Inc. (NYSE: HD), as an example. Say Nardelli has options to buy 1 million shares of the home improvement retailer at $32 per share and he exercises them when the stock is trading at $50. Using the method proposed by Goodwin, when Nardelli exercises those options, Home Depot expenses the spread, or $18 million.
(Nardelli's 1 million options for the year 2001 actually had a strike price of $32.20, and the stock ended 2001 at $50.89 per share, so the cost to Home Depot's bottom line would have been slightly more than the hypothetical amount above. Unfortunately, Home Depot's stock price has been steadily eroding, closing at $28.70 on July 19. It was unclear whether Nardelli had exercised those options and sold the shares before the stock began its decline.)
But to suggest that options are not compensation as many companies are arguing in Washington is ludicrous, said Goodwin, who has argued that point on a host of financial shows in the past few weeks, including on CNNfn.
Goodwin takes it one step further. Companies need to step up to the plate with something, as Coke has done, or brace themselves for added scrutiny by regulators in Washington, he said. © Copyright 2012, WABE