Teoría Y Práctica De Las Opciones Sobre Acciones De Los Empleados

Por la última vez: las opciones de compra de valores son un gasto El tiempo ha llegado a poner fin al debate sobre la contabilidad de las opciones sobre acciones la controversia ha estado pasando demasiado tiempo. De hecho, la norma que rige la presentación de informes sobre las opciones sobre acciones ejecutivas se remonta a 1972, cuando la Junta de Principios de Contabilidad, el predecesor del Consejo de Normas de Contabilidad Financiera (FASB), emitió la APB 25. La regla especificaba que el costo de las opciones en la subvención La fecha debe ser medida por su valor intrínseco la diferencia entre el valor justo de mercado actual de la acción y el precio de ejercicio de la opción. De acuerdo con este método, no se asignó ningún costo a las opciones cuando su precio de ejercicio se fijó al precio de mercado actual. La razón de ser de la regla era bastante simple: como no hay efectivo cambia de manos cuando se hace la concesión, la emisión de una opción de compra de acciones no es una transacción económicamente significativa. Eso es lo que muchos pensaban en ese momento. Lo que es más, poca teoría o práctica estaba disponible en 1972 para guiar a las compañías en la determinación del valor de tales instrumentos financieros no comercializados. APB 25 estaba obsoleto dentro de un año. La publicación en 1973 de la fórmula de Black-Scholes desencadenó un enorme auge en los mercados de opciones negociadas públicamente, un movimiento reforzado por la apertura, también en 1973, del Chicago Board Options Exchange. Ciertamente, no fue casualidad que el crecimiento de los mercados de opciones negociadas se reflejara en un uso cada vez mayor de las concesiones de opciones sobre acciones en la remuneración de ejecutivos y empleados. El National Center for Employee Ownership estima que cerca de 10 millones de empleados recibieron opciones sobre acciones en 2000 menos de 1 millón en 1990. Pronto se hizo evidente tanto en la teoría como en la práctica que las opciones de cualquier tipo valían mucho más que el valor intrínseco definido por APB 25. FASB inició una revisión de la contabilidad de opciones sobre acciones en 1984 y, después de más de una década de acalorada controversia, finalmente publicó el SFAS 123 en octubre de 1995. Recomendó, pero no exigió que las compañías informaran el costo de las opciones concedidas y determinaran su valor justo de mercado Utilizando modelos de precios de opciones. La nueva norma era un compromiso, que reflejaba un intenso cabildeo por parte de empresarios y políticos contra la obligatoriedad de informar. Argumentaron que las opciones de acciones ejecutivas eran uno de los componentes determinantes del renacimiento económico extraordinario de las Américas, por lo que cualquier intento de cambiar las reglas contables para ellos fue un ataque al modelo de gran éxito de América para crear nuevos negocios. Inevitablemente, la mayoría de las empresas optaron por ignorar la recomendación de que se oponían con tanta vehemencia y continuaron registrando sólo el valor intrínseco a la fecha de la concesión, normalmente cero, de sus donaciones de opciones sobre acciones. Posteriormente, el auge extraordinario de los precios de las acciones hizo que los críticos de la opción de gastos de aspecto como spoilsports. Pero desde el choque, el debate ha vuelto con una venganza. La avalancha de escándalos contables corporativos en particular ha revelado lo irreal de un cuadro de su desempeño económico muchas empresas han estado pintando en sus estados financieros. Cada vez más, los inversores y los reguladores han llegado a reconocer que la compensación basada en opciones es un factor de distorsión importante. Si AOL Time Warner en 2001, por ejemplo, informara sobre los gastos de las opciones de acciones de los empleados, según lo recomendado por el SFAS 123, habría mostrado una pérdida operativa de alrededor de 1.700 millones en lugar de los 700 millones de ingresos operativos que realmente reportó. Creemos que el argumento en favor de las opciones de gastos es abrumador y en las páginas siguientes examinamos y rechazamos las principales alegaciones formuladas por quienes continúan oponiéndose a ella. Demostramos que, contrariamente a estos argumentos de expertos, las subvenciones a las opciones de acciones tienen implicaciones reales de flujo de efectivo que deben ser reportadas, que la forma de cuantificar esas implicaciones está disponible, que la divulgación de la nota de pie de página no es un sustituto aceptable para reportar la transacción en el ingreso Declaración y balance, y que el pleno reconocimiento de los costos de las opciones no tiene que emascular los incentivos de los emprendimientos empresariales. Luego discutiremos cómo las empresas podrían reportar el costo de las opciones en sus estados de resultados y balances. Fallacy 1: Las opciones sobre acciones no representan un costo real Es un principio básico de la contabilidad que los estados financieros deben registrar transacciones económicamente significativas. Nadie duda de que las opciones negociadas cumplen ese criterio miles de millones de dólares son comprados y vendidos todos los días, ya sea en el mercado de venta libre o en los intercambios. Para muchas personas, sin embargo, las subvenciones de acciones de la empresa son una historia diferente. Estas transacciones no son económicamente significativas, argumenta el argumento, porque no hay efectivo cambia de manos. Como expresó el ex CEO de American Express Harvey Golub en un artículo del 8 de agosto de 2002, Wall Street Journal, las concesiones de opciones sobre acciones nunca son un costo para la compañía y, por lo tanto, nunca deben registrarse como un costo en la cuenta de resultados. Esa posición desafía la lógica económica, por no mencionar el sentido común, en varios aspectos. Para empezar, las transferencias de valor no tienen que implicar transferencias de efectivo. Si bien una transacción que implica un recibo de efectivo o un pago es suficiente para generar una transacción grabable, no es necesario. Eventos como el intercambio de acciones por activos, la firma de un contrato de arrendamiento, la provisión de futuros beneficios de pensión o vacaciones para el empleo en el período actual, o la adquisición de materiales a crédito, todas las transacciones contables de activación porque implican transferencias de valor, Se produce la transacción. Incluso si no hay efectivo cambia de manos, la emisión de opciones sobre acciones a los empleados incurre en un sacrificio de dinero en efectivo, un costo de oportunidad, que debe ser contabilizado. Si una empresa otorgara acciones, en lugar de opciones, a los empleados, todos estarían de acuerdo en que el costo de la empresa para esta transacción sería el efectivo que de otro modo habría recibido si hubiera vendido las acciones al precio actual de mercado a los inversionistas. Es exactamente lo mismo con las opciones de acciones. Cuando una empresa otorga opciones a los empleados, renuncia a la oportunidad de recibir efectivo de los suscriptores que podrían tomar estas mismas opciones y venderlas en un mercado de opciones competitivas a los inversionistas. Warren Buffett hizo este punto gráficamente en un 9 de abril de 2002, la columna del Washington Post cuando dijo: Berkshire Hathaway estará encantado de recibir opciones en lugar de dinero en efectivo para muchos de los bienes y servicios que vendemos América corporativa. La concesión de opciones a los empleados en lugar de venderlos a proveedores o inversores a través de suscriptores implica una pérdida real de efectivo para la empresa. Por supuesto, se puede argumentar más razonablemente que el efectivo perdido por la emisión de opciones a los empleados, en lugar de venderlos a los inversores, se compensa con el efectivo que la empresa conserva al pagar a sus empleados menos efectivo. Burton G. Malkiel y William J. Baumol, observaron en un artículo publicado el 4 de abril de 2002 en Wall Street Journal: Una nueva empresa emprendedora puede no ser capaz de proporcionar la compensación monetaria necesaria para atraer a trabajadores destacados. En su lugar, puede ofrecer opciones sobre acciones. Pero Malkiel y Baumol, desafortunadamente, no siguen su observación hasta su conclusión lógica. Porque si el costo de las opciones de compra de acciones no es universalmente incorporado en la medición de la utilidad neta, las compañías que otorgan opciones tendrán menos costos de compensación, y no será posible comparar sus medidas de rentabilidad, productividad y retorno sobre capital con las de las economías Equivalentes que simplemente han estructurado su sistema de compensación de una manera diferente. La siguiente ilustración hipotética muestra cómo eso puede suceder. Imagine que dos compañías, KapCorp y MerBod, compiten exactamente en la misma línea de negocio. Los dos difieren sólo en la estructura de sus paquetes de compensación de los empleados. KapCorp paga a sus trabajadores 400.000 en la compensación total en forma de dinero en efectivo durante el año. A principios de año, también emite, a través de una suscripción, 100.000 opciones de opciones en el mercado de capitales, que no pueden ejercerse por un año, y requiere que sus empleados utilicen 25 de su compensación para comprar las nuevas opciones emitidas. La salida neta de efectivo a KapCorp es de 300.000 (400.000 en gastos de compensación menos 100.000 de la venta de las opciones). MerBods enfoque es sólo un poco diferente. Paga a sus trabajadores 300.000 en efectivo y los emite directamente 100.000 de opciones al comienzo del año (con la misma restricción de ejercicio de un año). Económicamente, las dos posiciones son idénticas. Cada compañía ha pagado un total de 400.000 en compensación, cada una ha emitido 100.000 opciones de valor, y para cada una el flujo de caja neto totaliza 300.000 después de que el efectivo recibido de la emisión de las opciones se resta del dinero gastado en la compensación. Los empleados de ambas compañías tienen las mismas 100.000 opciones durante el año, produciendo los mismos efectos de motivación, incentivo y retención. ¿Qué tan legítimo es un estándar de contabilidad que permite que dos transacciones económicamente idénticas produzcan números radicalmente diferentes? Al preparar sus estados de fin de año, KapCorp registrará un gasto de compensación de 400.000 y mostrará 100.000 en opciones en su balance en una cuenta de capital accionario. Sin embargo, si el costo de opciones sobre acciones emitidas a empleados no se reconoce como un gasto, MerBod registrará un gasto de compensación de sólo 300.000 y no mostrará ninguna opción emitida en su balance. Suponiendo ingresos y costos idénticos, parecería que las ganancias de MerBods eran 100,000 más altas que KapCorps. MerBod también parecerá tener una menor base de capital que KapCorp, a pesar de que el aumento en el número de acciones pendientes eventualmente será el mismo para ambas empresas si todas las opciones son ejercidas. Como resultado del menor gasto de compensación y menor posición patrimonial, el desempeño de MerBods por la mayoría de las medidas analíticas parecerá ser muy superior a KapCorps. Esta distorsión es, por supuesto, repetida cada año que las dos empresas elegir las diferentes formas de compensación. ¿Qué tan legítimo es un estándar de contabilidad que permite que dos transacciones económicamente idénticas produzcan números radicalmente diferentes? Falacia 2: El costo de las opciones sobre acciones de los empleados no puede ser estimado Algunos opositores a la opción de gasto defienden su posición sobre bases prácticas, no conceptuales. Los modelos de precios de opciones pueden funcionar, dicen, como una guía para valorar las opciones negociadas públicamente. Pero no pueden captar el valor de las opciones sobre acciones de los empleados, que son contratos privados entre la empresa y el empleado para instrumentos ilíquidos que no pueden ser vendidos libremente, permutados, dados en garantía o cubiertos. Es cierto que, en general, la falta de liquidez de un instrumento reducirá su valor para el tenedor. Pero la pérdida de liquidez de los tenedores no hace ninguna diferencia con lo que le cuesta al emisor crear el instrumento a menos que el emisor se beneficie de alguna manera de la falta de liquidez. Y para las opciones sobre acciones, la ausencia de un mercado líquido tiene poco efecto sobre su valor para el tenedor. La gran belleza de los modelos de precios de opción es que se basan en las características de la acción subyacente. Es precisamente por eso que han contribuido al extraordinario crecimiento de los mercados de opciones durante los últimos 30 años. El precio Black-Scholes de una opción equivale al valor de una cartera de acciones y efectivo que se administra dinámicamente para replicar los beneficios de esa opción. Con una acción completamente líquida, un inversionista sin restricciones podría cubrir completamente el riesgo de opciones y extraer su valor vendiendo la cartera de replicación de acciones y efectivo. En ese caso, el descuento de liquidez sobre el valor de las opciones sería mínimo. Y eso aplica incluso si no había mercado para negociar la opción directamente. Por lo tanto, la liquidez o falta de mercados de opciones sobre acciones no conduce, por sí misma, a un descuento en el valor de las opciones para el tenedor. Los bancos de inversión, los bancos comerciales y las compañías de seguros ahora han ido mucho más allá del modelo básico de Black-Scholes, de 30 años, para desarrollar enfoques para tasar todo tipo de opciones: las estándar. Exóticos. Opciones negociadas a través de intermediarios, sin contrapartida, y en intercambios. Opciones vinculadas a fluctuaciones monetarias. Opciones incluidas en valores complejos como deuda convertible, acciones preferentes o deuda exigible como hipotecas con características de pago anticipado o topes y pisos de tasas de interés. Toda una subindustria se ha desarrollado para ayudar a individuos, empresas y gerentes de mercados monetarios a comprar y vender estos complejos valores. La tecnología financiera actual ciertamente permite a las empresas incorporar todas las características de las opciones sobre acciones de los empleados en un modelo de precios. Algunos bancos de inversión incluso cotizan precios para los ejecutivos que buscan cubrir o vender sus opciones sobre acciones antes de la adquisición, si el plan de opciones de su compañía lo permite. Por supuesto, las estimaciones basadas en fórmulas o en suscriptores sobre el costo de las opciones sobre acciones de los empleados son menos precisas que los pagos en efectivo o las donaciones de acciones. Sin embargo, los estados financieros deben esforzarse por ser aproximadamente correctos al reflejar la realidad económica en vez de precisamente equivocados. Los gerentes recurren rutinariamente a estimaciones de partidas importantes de costos, tales como la depreciación de la planta y el equipo y las provisiones contra pasivos contingentes, tales como las limpiezas ambientales futuras y los asentamientos de demandas por responsabilidad por productos y otros litigios. Por ejemplo, los administradores utilizan estimaciones actuariales de las tasas de interés futuras, las tasas de retención de empleados, las fechas de jubilación de los empleados, la longevidad de los empleados y sus cónyuges y la escalada de los costos médicos futuros. Los modelos de precios y la amplia experiencia hacen posible estimar el costo de las opciones sobre acciones emitidas en un período determinado con una precisión comparable o superior a muchos de estos otros elementos que ya aparecen en los estados de resultados y en los balances de las empresas. No todas las objeciones al uso de Black-Scholes y otros modelos de valoración de opciones se basan en dificultades en la estimación del costo de las opciones otorgadas. Por ejemplo, John DeLong, en un artículo del Instituto Competitivo de Empresas de junio de 2002 titulado The Stock Options Controversy y New Economy, argumentó que incluso si un valor se calculaba de acuerdo con un modelo, el cálculo requeriría un ajuste para reflejar el valor para el empleado. Sólo tiene la mitad de razón. Al pagar a los empleados con sus propias acciones u opciones, la compañía las obliga a tener carteras financieras altamente no diversificadas, un riesgo aún más agravado por la inversión del capital humano propio de los empleados en la empresa. Dado que casi todos los individuos son aversos al riesgo, podemos esperar que los empleados asignen sustancialmente menos valor a su paquete de opciones sobre acciones que otros inversionistas mejor diversificados. Las estimaciones de la magnitud de este riesgo de los empleados o de peso muerto costo, ya que a veces se llama rango de 20 a 50, dependiendo de la volatilidad de la acción subyacente y el grado de diversificación de la cartera de empleados. La existencia de este costo de peso muerto a veces se utiliza para justificar la escala aparentemente enorme de la remuneración basada en la opción entregada a los altos ejecutivos. Una empresa que busca, por ejemplo, recompensar a su CEO con 1 millón en opciones que valen 1.000 cada uno en el mercado puede (quizás perversamente) razonar que debería emitir 2.000 en lugar de 1.000 opciones porque, desde la perspectiva de los CEOs, las opciones valen Sólo 500 cada uno. (Cabe señalar que este razonamiento valida nuestro punto anterior de que las opciones son un sustituto del efectivo). Pero aunque podría razonablemente ser razonable tener en cuenta el costo de peso muerto al decidir cuánto compensación basada en acciones (como opciones) incluir en Un paquete de pago de los ejecutivos, ciertamente no es razonable dejar que el peso muerto influya en la forma en que las compañías registran los costos de los paquetes. Los estados financieros reflejan la perspectiva económica de la empresa, no las entidades (incluyendo los empleados) con las que realiza transacciones. Cuando una empresa vende un producto a un cliente, por ejemplo, no tiene que verificar qué vale el producto para ese individuo. Cuenta el pago en efectivo esperado en la transacción como su ingreso. Del mismo modo, cuando la empresa compra un producto o servicio a un proveedor, no examina si el precio pagado fue mayor o menor que el costo de los proveedores o lo que el proveedor podría haber recibido si hubiera vendido el producto o servicio en otro lugar. La compañía registra el precio de compra como el efectivo o equivalente en efectivo que sacrificó para adquirir el bien o servicio. Supongamos que un fabricante de ropa construyera un gimnasio para sus empleados. La compañía no lo haría para competir con los clubes de fitness. Construiría el centro para generar mayores ingresos gracias al aumento de la productividad y la creatividad de empleados más saludables y felices ya reducir los costos derivados de la rotación de los empleados y la enfermedad. El costo para la empresa es claramente el costo de construir y mantener la instalación, no el valor que los empleados individuales pueden colocar en ella. El costo del centro de acondicionamiento físico se registra como un gasto periódico, ligeramente ajustado al aumento esperado de los ingresos y las reducciones en los costos relacionados con los empleados. La única justificación razonable que hemos visto para el costo de opciones ejecutivas por debajo de su valor de mercado se deriva de la observación de que muchas opciones se pierden cuando los empleados dejan, o se ejercen demasiado temprano debido a la aversión al riesgo de los empleados. En estos casos, el patrimonio de los accionistas existentes se diluye menos de lo que de otro modo sería, o no en absoluto, reduciendo consecuentemente el costo de compensación de la compañía. Aunque estamos de acuerdo con la lógica básica de este argumento, el impacto del decomiso y el ejercicio temprano sobre los valores teóricos puede ser exageradamente exagerado. El Impacto Real de la Confiscación y el Ejercicio Temprano A diferencia del salario en efectivo, las opciones de compra de acciones no pueden ser transferidas del individuo que las otorgó a nadie más (ver el Real Impacto de la Confiscación y Ejercicio Temprano al final de este artículo). La no transferibilidad tiene dos efectos que se combinan para hacer que las opciones de los empleados sean menos valiosas que las opciones convencionales negociadas en el mercado. En primer lugar, los empleados pierden sus opciones si salen de la empresa antes de las opciones han adquirido. En segundo lugar, los empleados tienden a reducir su riesgo mediante el ejercicio de opciones sobre acciones adquiridas mucho antes que un inversionista bien diversificado, reduciendo así el potencial de un pago mucho mayor si hubieran mantenido las opciones hasta su vencimiento. Los empleados con opciones adquiridas que están en el dinero también los ejercitarán cuando renuncien, ya que la mayoría de las empresas requieren que los empleados utilicen o pierdan sus opciones al salir. En ambos casos, se reduce el impacto económico en la emisión de las opciones, ya que el valor y el tamaño relativo de las participaciones existentes en los accionistas se diluyen menos de lo que podrían haber sido o no han sido. Reconociendo la creciente probabilidad de que las compañías estén obligadas a gastar opciones de compra de acciones, algunos opositores están luchando una acción de retaguardia tratando de persuadir a los normalizadores de reducir significativamente el costo reportado de esas opciones, descontando su valor de los medidos por los modelos financieros para reflejar la fuerte Probabilidad de confiscación y ejercicio temprano. Las propuestas actuales presentadas por estas personas al FASB y al IASB permitirían a las compañías estimar el porcentaje de opciones perdidas durante el período de carencia y reducir el costo de las concesiones de opción por este monto. Además, en lugar de utilizar la fecha de vencimiento para la vida de la opción en un modelo de precios de opción, las propuestas buscan permitir a las empresas utilizar una vida esperada para que la opción refleje la probabilidad de ejercicio temprano. El uso de una vida esperada (que las empresas pueden estimar cerca del período de adquisición, por ejemplo, cuatro años) en lugar del período contractual de, digamos, diez años, reduciría significativamente el costo estimado de la opción. Debe hacerse algún ajuste para el decomiso y el ejercicio temprano. Sin embargo, el método propuesto exagera considerablemente la reducción de costos, ya que descuida las circunstancias en las que es más probable que las opciones se pierdan o se ejerzan temprano. Cuando se toman en cuenta estas circunstancias, es probable que la reducción de los costos de las opciones de los empleados sea mucho menor. Primero, considere el decomiso. El uso de un porcentaje fijo para confiscaciones basadas en la rotación histórica o futura de empleados es válida sólo si la confiscación es un evento al azar, como una lotería, independientemente del precio de la acción. En realidad, sin embargo, la probabilidad de confiscación está relacionada negativamente con el valor de las opciones perdidas y, por lo tanto, con el precio de las acciones en sí. Las personas tienen más probabilidades de abandonar una empresa y perder las opciones cuando el precio de las acciones ha disminuido y las opciones valen poco. Pero si la empresa ha hecho bien y el precio de las acciones ha aumentado significativamente desde la fecha de la concesión, las opciones se han convertido en mucho más valioso, y los empleados tendrán menos probabilidades de salir. Si la rotación de empleados y el decomiso son más probables cuando las opciones son menos valiosas, entonces poco del costo total de las opciones en la fecha de concesión se reduce debido a la probabilidad de pérdida. El argumento para el ejercicio temprano es similar. También depende del precio de las acciones futuras. Los empleados tenderán a ejercitarse temprano si la mayor parte de su riqueza está vinculada en la empresa, necesitan diversificarse y no tienen otra manera de reducir su exposición al riesgo al precio de las acciones de la compañía. No obstante, es probable que los altos ejecutivos, con las tenencias de opciones más grandes, no hagan ejercicio anticipadamente y destruyan el valor de las opciones cuando el precio de las acciones haya aumentado sustancialmente. A menudo poseen acciones no restringidas, que pueden vender como un medio más eficiente para reducir su exposición al riesgo. O tienen bastante en juego para contratar con un banco de inversión para cubrir sus posiciones de opción sin ejercer prematuramente. Al igual que con la característica de decomiso, el cálculo de una vida de opción esperada sin tener en cuenta la magnitud de las tenencias de los empleados que se ejercitan con anticipación, o su capacidad para cubrir su riesgo por otros medios, subestimaría significativamente el costo de las opciones otorgadas. Los modelos de fijación de precios de las opciones pueden modificarse para incorporar la influencia de los precios de las acciones y la magnitud de la opción de los empleados y las tenencias de acciones sobre las probabilidades de decomiso y ejercicio temprano. La magnitud real de estos ajustes debe basarse en datos específicos de la empresa, tales como la apreciación del precio de las acciones y la distribución de los mismos. Entre los empleados. Los ajustes, debidamente evaluados, podrían resultar significativamente menores que los cálculos propuestos (aparentemente respaldados por el FASB y el IASB). De hecho, para algunas empresas, un cálculo que ignora la confiscación y el ejercicio temprano en conjunto podría acercarse más al verdadero costo de las opciones que uno que ignora por completo los factores que influyen en el decomiso de los empleados y las decisiones de ejercicio temprano. Falacia 3: los costos de las opciones de acciones ya se han revelado adecuadamente Otro argumento en defensa del enfoque existente es que las compañías ya divulgan información sobre el costo de las concesiones de opciones en las notas a pie de página de los estados financieros. Por lo tanto, los inversionistas y analistas que desean ajustar los estados de resultados para el costo de las opciones, tienen los datos necesarios disponibles. Encontramos ese argumento difícil de tragar. Como hemos señalado, es un principio fundamental de la contabilidad que la declaración de ingresos y el balance deben presentar la economía subyacente de una empresa. Relegar un elemento de importancia económica tan importante como las concesiones de opciones de los empleados a las notas de pie de página distorsionaría sistemáticamente esos informes. Pero aun aceptando el principio de que la divulgación de la nota a pie de página es suficiente, en realidad encontraríamos un sustituto pobre para reconocer el gasto directamente en las declaraciones primarias. Para empezar, los analistas de inversión, abogados y reguladores usan ahora bases de datos electrónicas para calcular los ratios de rentabilidad basados ​​en los números de las cuentas de pérdidas y ganancias de las compañías auditadas. Un analista que sigue a una empresa individual, o incluso a un pequeño grupo de empresas, podría hacer ajustes por la información revelada en notas a pie de página. Pero eso sería difícil y costoso para un gran grupo de empresas que habían puesto diferentes tipos de datos en varios formatos no estándar en notas a pie de página. Claramente, es mucho más fácil comparar compañías en un terreno de juego equitativo, donde todos los gastos de compensación se han incorporado en los números de ingresos. Lo que es más, los números divulgados en notas a pie de página pueden ser menos confiables que los divulgados en los estados financieros primarios. Por una parte, los ejecutivos y los auditores normalmente revisan las notas de pie de página suplementarias y les dedican menos tiempo que a los números de las declaraciones primarias. Como ejemplo, la nota de pie de página en el informe anual de eBay 2000 revela un valor razonable promedio ponderado de las opciones otorgadas durante 1999 de 105,03 para un año en el que el promedio ponderado de las acciones concedidas fue de 64,59. No es obvio cómo el valor de las opciones otorgadas puede ser 63 más que el valor de la acción subyacente. En el ejercicio 2000, se reportó el mismo efecto: un valor razonable de las opciones otorgadas de 103,79 con un precio de ejercicio promedio de 62,69. Aparentemente, este error fue finalmente detectado, ya que el informe del año fiscal 2001 ajustó retroactivamente los valores de la fecha de concesión promedio de 1999 y 2000 a 40.45 y 41.40, respectivamente. Creemos que los ejecutivos y los auditores ejercerán una mayor diligencia y cuidado en la obtención de estimaciones confiables del costo de las opciones sobre acciones si estas cifras están incluidas en las declaraciones de ingresos de las compañías de lo que actualmente hacen para la divulgación de la nota al pie. Nuestro colega William Sahlman en su artículo de diciembre de 2002 HBR, Expensing Options Solves Nothing, ha expresado su preocupación de que la abundancia de información útil contenida en las notas al pie sobre las opciones de acciones concedidas se perdería si las opciones se contabilizaban. Sin embargo, reconocer el costo de las opciones en la cuenta de resultados no impide seguir proporcionando una nota de pie de página que explica la distribución subyacente de las subvenciones y la metodología y parámetros utilizados para calcular el costo de las opciones sobre acciones. Algunos críticos de la opción de compra de acciones argumentan, como el capitalista de riesgo John Doerr y Frederick Smith, CEO de FedEx, hicieron en una columna del New York Times del 5 de abril de 2002, que si se requerían gastos, el impacto de las opciones se contaría dos veces en las ganancias por acción : Primero como una dilución potencial de las ganancias, aumentando las acciones en circulación, y segundo como un cargo contra los ingresos reportados. El resultado sería una ganancia por acción inexacta y engañosa. Tenemos varias dificultades con este argumento. Primero, los costos de opción sólo entran en un cálculo de utilidades por acción diluido (GAAP) cuando el precio de mercado actual excede el precio de ejercicio de la opción. Por lo tanto, los números de EPS totalmente diluidos siguen ignorando todos los costos de las opciones que están casi en el dinero o podrían convertirse en el dinero si el precio de las acciones aumentó significativamente en el corto plazo. En segundo lugar, el hecho de relegar la determinación del impacto económico de las donaciones de opciones sobre acciones únicamente a un cálculo de las EPS distorsiona considerablemente la medición de los ingresos informados, no se ajustaría para reflejar el impacto económico de los costos de las opciones. Estas medidas son resúmenes más significativos del cambio en el valor económico de una empresa que la distribución proporcional de este ingreso a los accionistas individuales revelada en la medida de EPS. Supongamos que las empresas debían compensar a todos sus proveedores de materiales, mano de obra, energía y servicios comprados con opciones sobre acciones en lugar de en efectivo y evitar todo reconocimiento de gastos en su estado de resultados. Sus ingresos y sus medidas de rentabilidad estarían tan inflados que no servirían de nada para propósitos analíticos, sólo el número de EPS recogería cualquier efecto económico de las donaciones de opciones. Sin embargo, nuestra objeción más grande a esta afirmación falsa es que incluso un cálculo del BPA totalmente diluido no refleja completamente el impacto económico de las donaciones de opciones sobre acciones. El siguiente ejemplo hipotético ilustra los problemas, aunque con fines de simplicidad utilizaremos las concesiones de acciones en lugar de las opciones. El razonamiento es exactamente el mismo para ambos casos. Digamos que cada una de nuestras dos compañías hipotéticas, KapCorp y MerBod, tiene 8,000 acciones pendientes, sin deuda, y los ingresos anuales este año de 100,000. KapCorp decide pagar a sus empleados y proveedores 90,000 en efectivo y no tiene otros gastos. MerBod, sin embargo, compensa a sus empleados y proveedores con 80.000 en efectivo y 2.000 acciones, a un precio promedio de mercado de 5 por acción. El coste para cada empresa es el mismo: 90.000. Pero sus ingresos netos y los números de EPS son muy diferentes. El beneficio neto antes de impuestos de KapCorps es 10.000, o 1,25 por acción. Por el contrario, MerBods reportó una utilidad neta (que ignora el costo del patrimonio otorgado a empleados y proveedores) es de 20,000, y su EPS es de 2,00 (que toma en cuenta las nuevas acciones emitidas). Por supuesto, las dos compañías ahora tienen diferentes saldos de efectivo y el número de acciones en circulación con una reclamación sobre ellos. Pero KapCorp puede eliminar esa discrepancia mediante la emisión de 2.000 acciones en el mercado durante el año a un precio de venta promedio de 5 por acción. Ahora ambas compañías tienen saldos de efectivo de cierre de 20.000 y 10.000 acciones pendientes. De acuerdo con las normas contables actuales, sin embargo, esta transacción sólo exacerba la brecha entre los números de EPS. KapCorps informó que los ingresos siguen siendo 10.000, ya que el valor adicional de 10.000 obtenido de la venta de las acciones no se informa en la utilidad neta, pero su denominador EPS ha aumentado de 8.000 a 10.000. En consecuencia, KapCorp ahora informa un EPS de 1,00 a MerBods 2,00, a pesar de que sus posiciones económicas son idénticas: 10.000 acciones en circulación y un aumento de los saldos de caja de 20.000. Las personas que afirman que las opciones de gastos crea un problema de conteo doble están creando una pantalla de humo para ocultar los efectos de distorsión de los ingresos de las concesiones de opciones sobre acciones. Las personas que afirman que las opciones de gastos crea un problema de conteo doble están creando una pantalla de humo para ocultar los efectos de distorsión de los ingresos de las concesiones de opciones sobre acciones. De hecho, si decimos que la cifra EPS diluida es la forma correcta de revelar el impacto de las opciones sobre acciones, debemos cambiar inmediatamente las normas contables actuales para las situaciones en que las empresas emiten acciones ordinarias, preferentes convertibles o bonos convertibles para pagar Servicios o activos. En la actualidad, cuando se producen estas transacciones, el costo se mide por el valor justo de mercado de la contraprestación considerada. Why should options be treated differently Fallacy 4: Expensing Stock Options Will Hurt Young Businesses Opponents of expensing options also claim that doing so will be a hardship for entrepreneurial high-tech firms that do not have the cash to attract and retain the engineers and executives who translate entrepreneurial ideas into profitable, long-term growth. This argument is flawed on a number of levels. For a start, the people who claim that option expensing will harm entrepreneurial incentives are often the same people who claim that current disclosure is adequate for communicating the economics of stock option grants. The two positions are clearly contradictory. If current disclosure is sufficient, then moving the cost from a footnote to the balance sheet and income statement will have no market effect. But to argue that proper costing of stock options would have a significant adverse impact on companies that make extensive use of them is to admit that the economics of stock options, as currently disclosed in footnotes, are not fully reflected in companies market prices. More seriously, however, the claim simply ignores the fact that a lack of cash need not be a barrier to compensating executives. Rather than issuing options directly to employees, companies can always issue them to underwriters and then pay their employees out of the money received for those options. Considering that the market systematically puts a higher value on options than employees do, companies are likely to end up with more cash from the sale of externally issued options (which carry with them no deadweight costs) than they would by granting options to employees in lieu of higher salaries. Even privately held companies that raise funds through angel and venture capital investors can take this approach. The same procedures used to place a value on a privately held company can be used to estimate the value of its options, enabling external investors to provide cash for options about as readily as they provide cash for stock. Thats not to say, of course, that entrepreneurs should never get option grants. Venture capital investors will always want employees to be compensated with some stock options in lieu of cash to be assured that the employees have some skin in the game and so are more likely to be honest when they tout their companys prospects to providers of new capital. But that does not preclude also raising cash by selling options externally to pay a large part of the cash compensation to employees. We certainly recognize the vitality and wealth that entrepreneurial ventures, particularly those in the high-tech sector, bring to the U. S. economy. A strong case can be made for creating public policies that actively assist these companies in their early stages, or even in their more established stages. The nation should definitely consider a regulation that makes entrepreneurial, job-creating companies healthier and more competitive by changing something as simple as an accounting journal entry. But we have to question the effectiveness of the current rule, which essentially makes the benefits from a deliberate accounting distortion proportional to companies use of one particular form of employee compensation. After all, some entrepreneurial, job-creating companies might benefit from picking other forms of incentive compensation that arguably do a better job of aligning executive and shareholder interests than conventional stock options do. Indexed or performance options, for example, ensure that management is not rewarded just for being in the right place at the right time or penalized just for being in the wrong place at the wrong time. A strong case can also be made for the superiority of properly designed restricted stock grants and deferred cash payments. Yet current accounting standards require that these, and virtually all other compensation alternatives, be expensed. Are companies that choose those alternatives any less deserving of an accounting subsidy than Microsoft, which, having granted 300 million options in 2001 alone, is by far the largest issuer of stock options A less distorting approach for delivering an accounting subsidy to entrepreneurial ventures would simply be to allow them to defer some percentage of their total employee compensation for some number of years, which could be indefinitelyjust as companies granting stock options do now. That way, companies could get the supposed accounting benefits from not having to report a portion of their compensation costs no matter what form that compensation might take. What Will Expensing Involve Although the economic arguments in favor of reporting stock option grants on the principal financial statements seem to us to be overwhelming, we do recognize that expensing poses challenges. For a start, the benefits accruing to the company from issuing stock options occur in future periods, in the form of increased cash flows generated by its option motivated and retained employees. The fundamental matching principle of accounting requires that the costs of generating those higher revenues be recognized at the same time the revenues are recorded. This is why companies match the cost of multiperiod assets such as plant and equipment with the revenues these assets produce over their economic lives. In some cases, the match can be based on estimates of the future cash flows. In expensing capitalized software-development costs, for instance, managers match the costs against a predicted pattern of benefits accrued from selling the software. In the case of options, however, managers would have to estimate an equivalent pattern of benefits arising from their own decisions and activities. That would likely introduce significant measurement error and provide opportunities for managers to bias their estimates. We therefore believe that using a standard straight-line amortization formula will reduce measurement error and management bias despite some loss of accuracy. The obvious period for the amortization is the useful economic life of the granted option, probably best measured by the vesting period. Thus, for an option vesting in four years, 1/48 of the cost of the option would be expensed through the income statement in each month until the option vests. This would treat employee option compensation costs the same way the costs of plant and equipment or inventory are treated when they are acquired through equity instruments, such as in an acquisition. In addition to being reported on the income statement, the option grant should also appear on the balance sheet. In our opinion, the cost of options issued represents an increase in shareholders equity at the time of grant and should be reported as paid-in capital. Some experts argue that stock options are more like contingent liability than equity transactions since their ultimate cost to the company cannot be determined until employees either exercise or forfeit their options. This argument, of course, ignores the considerable economic value the company has sacrificed at time of grant. Whats more, a contingent liability is usually recognized as an expense when it is possible to estimate its value and the liability is likely to be incurred. At time of grant, both these conditions are met. The value transfer is not just probable it is certain. The company has granted employees an equity security that could have been issued to investors and suppliers who would have given cash, goods, and services in return. The amount sacrificed can also be estimated, using option-pricing models or independent estimates from investment banks. There has to be, of course, an offsetting entry on the asset side of the balance sheet. FASB, in its exposure draft on stock option accounting in 1994, proposed that at time of grant an asset called prepaid compensation expense be recognized, a recommendation we endorse. FASB, however, subsequently retracted its proposal in the face of criticism that since employees can quit at any time, treating their deferred compensation as an asset would violate the principle that a company must always have legal control over the assets it reports. We feel that FASB capitulated too easily to this argument. The firm does have an asset because of the option grantpresumably a loyal, motivated employee. Even though the firm does not control the asset in a legal sense, it does capture the benefits. FASBs concession on this issue subverted substance to form. Finally, there is the issue of whether to allow companies to revise the income number theyve reported after the grants have been issued. Some commentators argue that any recorded stock option compensation expense should be reversed if employees forfeit the options by leaving the company before vesting or if their options expire unexercised. But if companies were to mark compensation expense downward when employees forfeit their options, should they not also mark it up when the share price rises, thereby increasing the market value of the options Clearly, this can get complicated, and it comes as no surprise that neither FASB nor IASB recommends any kind of postgrant accounting revisions, since that would open up the question of whether to use mark-to-market accounting for all types of assets and liabilities, not just share options. At this time, we dont have strong feelings about whether the benefits from mark-to-market accounting for stock options exceed the costs. But we would point out that people who object to estimating the cost of options granted at time of issue should be even less enthusiastic about reestimating their options cost each quarter. We recognize that options are a powerful incentive, and we believe that all companies should consider them in deciding how to attract and retain talent and align the interests of managers and owners. But we also believe that failing to record a transaction that creates such powerful effects is economically indefensible and encourages companies to favor options over alternative compensation methods. It is not the proper role of accounting standards to distort executive and employee compensation by subsidizing one form of compensation relative to all others. Companies should choose compensation methods according to their economic benefitsnot the way they are reported. It is not the proper role of accounting standards to distort executive and employee compensation by subsidizing one form of compensation relative to all others. A version of this article appeared in the March 2003 issue of Harvard Business Review. Profits Without Prosperity Executive Summary Though corporate profits are high, and the stock market is booming, most Americans are not sharing in the economic recovery. While the top 0.1 of income recipients reap almost all the income gains, good jobs keep disappearing, and new ones tend to be insecure and underpaid. One of the major causes: Instead of investing their profits in growth opportunities, corporations are using them for stock repurchases. Take the 449 firms in the S38P 500 that were publicly listed from 2003 through 2012. During that period, they used 54 of their earnings8212a total of 2.4 trillion8212to buy back their own stock. Dividends absorbed an extra 37 of their earnings. That left little to fund productive capabilities or better incomes for workers. Why are such massive resources dedicated to stock buybacks Because stock-based instruments make up the majority of executives8217 pay, and buybacks drive up short-term stock prices. Buybacks contribute to runaway executive compensation and economic inequality in a major way. Because they extract value rather than create it, their overuse undermines the economy8217s health. To restore true prosperity to the country, government and business leaders must take steps to rein them in. Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming. Yet most Americans are not sharing in the recovery. While the top 0.1 of income recipientswhich include most of the highest-ranking corporate executivesreap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity. The allocation of corporate profits to stock buybacks deserves much of the blame. Consider the 449 companies in the SampP 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54 of their earningsa total of 2.4 trillionto buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37 of their earnings. That left very little for investments in productive capabilities or higher incomes for employees. The buyback wave has gotten so big, in fact, that even shareholdersthe presumed beneficiaries of all this corporate largesseare getting worried. It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies, Laurence Fink, the chairman and CEO of BlackRock, the worlds largest asset manager, wrote in an open letter to corporate America in March. Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks. Why are such massive resources being devoted to stock repurchases Corporate executives give several reasons, which I will discuss later. But none of them has close to the explanatory power of this simple truth: Stock-based instruments make up the majority of their pay, and in the short term buybacks drive up stock prices. In 2012 the 500 highest-paid executives named in proxy statements of U. S. public companies received, on average, 30.3 million each 42 of their compensation came from stock options and 41 from stock awards. By increasing the demand for a companys shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly earnings per share (EPS) targets. As a result, the very people we rely on to make investments in the productive capabilities that will increase our shared prosperity are instead devoting most of their companies profits to uses that will increase their own prosperitywith unsurprising results. Even when adjusted for inflation, the compensation of top U. S. executives has doubled or tripled since the first half of the 1990s, when it was already widely viewed as excessive. Meanwhile, overall U. S. economic performance has faltered. If the U. S. is to achieve growth that distributes income equitably and provides stable employment, government and business leaders must take steps to bring both stock buybacks and executive pay under control. The nations economic health depends on it. From Value Creation to Value Extraction For three decades Ive been studying how the resource allocation decisions of major U. S. corporations influence the relationship between value creation and value extraction, and how that relationship affects the U. S. economy. From the end of World War II until the late 1970s, a retain-and-reinvest approach to resource allocation prevailed at major U. S. corporations. They retained earnings and reinvested them in increasing their capabilities, first and foremost in the employees who helped make firms more competitive. They provided workers with higher incomes and greater job security, thus contributing to equitable, stable economic growthwhat I call sustainable prosperity. This pattern began to break down in the late 1970s, giving way to a downsize-and-distribute regime of reducing costs and then distributing the freed-up cash to financial interests, particularly shareholders. By favoring value extraction over value creation, this approach has contributed to employment instability and income inequality. As documented by the economists Thomas Piketty and Emmanuel Saez, the richest 0.1 of U. S. households collected a record 12.3 of all U. S. income in 2007, surpassing their 11.5 share in 1928, on the eve of the Great Depression. In the financial crisis of 20082009, their share fell sharply, but it has since rebounded, hitting 11.3 in 2012. Since the late 1980s, the largest component of the income of the top 0.1 has been compensation, driven by stock-based pay. Meanwhile, the growth of workers wages has been slow and sporadic, except during the internet boom of 19982000, the only time in the past 46 years when real wages rose by 2 or more for three years running. Since the late 1970s, average growth in real wages has increasingly lagged productivity growth. (See the exhibit When Productivity and Wages Parted Ways.) When Productivity and Wages Parted Ways From 1948 to the mid-1970s, increases in productivity and wages went hand in hand. Then a gap opened between the two. Find this and other HBR graphics in our Visual Library Not coincidentally, U. S. employment relations have undergone a transformation in the past three decades. Mass plant closings eliminated millions of unionized blue-collar jobs. The norm of a white-collar workers spending his or her entire career with one company disappeared. And the seismic shift toward offshoring left all members of the U. S. labor forceeven those with advanced education and substantial work experiencevulnerable to displacement. To some extent these structural changes could be justified initially as necessary responses to changes in technology and competition. In the early 1980s permanent plant closings were triggered by the inroads superior Japanese manufacturers had made in consumer-durable and capital-goods industries. In the early 1990s one-company careers fell by the wayside in the IT sector because the open-systems architecture of the microelectronics revolution devalued the skills of older employees versed in proprietary technologies. And in the early 2000s the offshoring of more-routine tasks, such as writing unsophisticated software and manning customer call centers, sped up as a capable labor force emerged in low-wage developing economies and communications costs plunged, allowing U. S. companies to focus their domestic employees on higher-value-added work. These practices chipped away at the loyalty and dampened the spending power of American workers, and often gave away key competitive capabilities of U. S. companies. Attracted by the quick financial gains they produced, many executives ignored the long-term effects and kept pursuing them well past the time they could be justified. A turning point was the wave of hostile takeovers that swept the country in the 1980s. Corporate raiders often claimed that the complacent leaders of the targeted companies were failing to maximize returns to shareholders. That criticism prompted boards of directors to try to align the interests of management and shareholders by making stock-based pay a much bigger component of executive compensation. Given incentives to maximize shareholder value and meet Wall Streets expectations for ever higher quarterly EPS, top executives turned to massive stock repurchases, which helped them manage stock prices. The result: Trillions of dollars that could have been spent on innovation and job creation in the U. S. economy over the past three decades have instead been used to buy back shares for what is effectively stock-price manipulation. Good Buybacks and Bad Not all buybacks undermine shared prosperity. There are two major types: tender offers and open-market repurchases. With the former, a company contacts shareholders and offers to buy back their shares at a stipulated price by a certain near-term date, and then shareholders who find the price agreeable tender their shares to the company. Tender offers can be a way for executives who have substantial ownership stakes and care about a companys long-term competitiveness to take advantage of a low stock price and concentrate ownership in their own hands. This can, among other things, free them from Wall Streets pressure to maximize short-term profits and allow them to invest in the business. Henry Singleton was known for using tender offers in this way at Teledyne in the 1970s, and Warren Buffett for using them at GEICO in the 1980s. (GEICO became wholly owned by Buffetts holding company, Berkshire Hathaway, in 1996.) As Buffett has noted, this kind of tender offer should be made when the share price is below the intrinsic value of the productive capabilities of the company and the company is profitable enough to repurchase the shares without impeding its real investment plans. But tender offers constitute only a small portion of modern buybacks. Most are now done on the open market, and my research shows that they often come at the expense of investment in productive capabilities and, consequently, arent great for long-term shareholders. Companies have been allowed to repurchase their shares on the open market with virtually no regulatory limits since 1982, when the SEC instituted Rule 10b-18 of the Securities Exchange Act. Under the rule, a corporations board of directors can authorize senior executives to repurchase up to a certain dollar amount of stock over a specified or open-ended period of time, and the company must publicly announce the buyback program. After that, management can buy a large number of the companys shares on any given business day without fear that the SEC will charge it with stock-price manipulationprovided, among other things, that the amount does not exceed a safe harbor of 25 of the previous four weeks average daily trading volume. The SEC requires companies to report total quarterly repurchases but not daily ones, meaning that it cannot determine whether a company has breached the 25 limit without a special investigation. Further Reading Economics Feature Gautam Mukunda The financialization of the economy has serious downsides. Despite the escalation in buybacks over the past three decades, the SEC has only rarely launched proceedings against a company for using them to manipulate its stock price. And even within the 25 limit, companies can still make huge purchases: Exxon Mobil, by far the biggest stock repurchaser from 2003 to 2012, can buy back about 300 million worth of shares a day, and Apple up to 1.5 billion a day. In essence, Rule 10b-18 legalized stock market manipulation through open-market repurchases. The rule was a major departure from the agencys original mandate, laid out in the Securities Exchange Act in 1934. The act was a reaction to a host of unscrupulous activities that had fueled speculation in the Roaring 20s, leading to the stock market crash of 1929 and the Great Depression. To prevent such shenanigans, the act gave the SEC broad powers to issue rules and regulations. During the Reagan years, the SEC began to roll back those rules. The commissions chairman from 1981 to 1987 was John Shad, a former vice chairman of E. F. Hutton and the first Wall Street insider to lead the commission in 50 years. He believed that the deregulation of securities markets would channel savings into economic investments more efficiently and that the isolated cases of fraud and manipulation that might go undetected did not justify onerous disclosure requirements for companies. The SECs adoption of Rule 10b-18 reflected that point of view. Debunking the Justifications for Buybacks Executives give three main justifications for open-market repurchases. Lets examine them one by one: 1. Buybacks are investments in our undervalued shares that signal our confidence in the companys future. This makes some sense. But the reality is that over the past two decades major U. S. companies have tended to do buybacks in bull markets and cut back on them, often sharply, in bear markets. (See the exhibit Where Did the Money from Productivity Increases Go) They buy high and, if they sell at all, sell low. Research by the Academic-Industry Research Network, a nonprofit I cofounded and lead, shows that companies that do buybacks never resell the shares at higher prices. Where Did the Money from Productivity Increases Go Buybacksas well as dividendshave skyrocketed in the past 20 years. (Note that these data are for the 251 companies that were in the SampP 500 in January 2013 and were public from 1981 through 2012. Inclusion of firms that went public after 1981, such as Microsoft, Cisco, Amgen, Oracle, and Dell, would make the increase in buybacks even more marked.) Though executives say they repurchase only undervalued stocks, buybacks increased when the stock market boomed, casting doubt on that claim. Find this and other HBR graphics in our Visual Library Source: Standard amp Poors Compustat database the Academic-Industry Research Network. Note: Mean repurchase and dividend amounts are in 2012 dollars. Once in a while a company that bought high in a boom has been forced to sell low in a bust to alleviate financial distress. GE, for example, spent 3.2 billion on buybacks in the first three quarters of 2008, paying an average price of 31.84 per share. Then, in the last quarter, as the financial crisis brought about losses at GE Capital, the company did a 12 billion stock issue at an average share price of 22.25, in a failed attempt to protect its triple-A credit rating. In general, when a company buys back shares at what turn out to be high prices, it eventually reduces the value of the stock held by continuing shareholders. The continuing shareholder is penalized by repurchases above intrinsic value, Warren Buffett wrote in his 1999 letter to Berkshire Hathaway shareholders. Buying dollar bills for 1.10 is not good business for those who stick around. 2. Buybacks are necessary to offset the dilution of earnings per share when employees exercise stock options. Calculations that I have done for high-tech companies with broad-based stock option programs reveal that the volume of open-market repurchases is generally a multiple of the volume of options that employees exercise. In any case, theres no logical economic rationale for doing repurchases to offset dilution from the exercise of employee stock options. Options are meant to motivate employees to work harder now to produce higher future returns for the company. Therefore, rather than using corporate cash to boost EPS immediately, executives should be willing to wait for the incentive to work. If the company generates higher earnings, employees can exercise their options at higher stock prices, and the company can allocate the increased earnings to investment in the next round of innovation. 3. Our company is mature and has run out of profitable investment opportunities therefore, we should return its unneeded cash to shareholders. Some people used to argue that buybacks were a more tax-efficient means of distributing money to shareholders than dividends. But that has not been the case since 2003, when the tax rates on long-term capital gains and qualified dividends were made the same. Much more important issues remain, however: What is the CEOs main role and his or her responsibility to shareholders Companies that have built up productive capabilities over long periods typically have huge organizational and financial advantages when they enter related markets. One of the chief functions of top executives is to discover new opportunities for those capabilities. When they opt to do large open-market repurchases instead, it raises the question of whether these executives are doing their jobs. A related issue is the notion that the CEOs main obligation is to shareholders. Its based on a misconception of the shareholders role in the modern corporation. The philosophical justification for giving them all excess corporate profits is that they are best positioned to allocate resources because they have the most interest in ensuring that capital generates the highest returns. This proposition is central to the maximizing shareholder value (MSV) arguments espoused over the years, most notably by Michael C. Jensen. The MSV school also posits that companies so-called free cash flow should be distributed to shareholders because only they make investments without a guaranteed returnand hence bear risk. Why Money for Reinvestment Has Dried Up Since the early 1980s, when restrictions on open-market buybacks were greatly eased, distributions to shareholders have absorbed a huge portion of net income, leaving much less for reinvestment in companies. Note: Data are for the 251 companies that were in the SampP 500 Index in January 2013 and were publicly listed from 1981 through 2012. If the companies that went public after 1981, such as Microsoft, Cisco, Amgen, Oracle, and Dell, were included, repurchases as a percentage of net income would be even higher. But the MSV school ignores other participants in the economy who bear risk by investing without a guaranteed return. Taxpayers take on such risk through government agencies that invest in infrastructure and knowledge creation. And workers take it on by investing in the development of their capabilities at the firms that employ them. As risk bearers, taxpayers, whose dollars support business enterprises, and workers, whose efforts generate productivity improvements, have claims on profits that are at least as strong as the shareholders. The irony of MSV is that public-company shareholders typically never invest in the value-creating capabilities of the company at all. Rather, they invest in outstanding shares in the hope that the stock price will rise. And a prime way in which corporate executives fuel that hope is by doing buybacks to manipulate the market. The only money that Apple ever raised from public shareholders was 97 million at its IPO in 1980. Yet in recent years, hedge fund activists such as David Einhorn and Carl Icahnwho played absolutely no role in the companys success over the decadeshave purchased large amounts of Apple stock and then pressured the company to announce some of the largest buyback programs in history. The past decades huge increase in repurchases, in addition to high levels of dividends, have come at a time when U. S. industrial companies face new competitive challenges. This raises questions about how much of corporate cash flow is really free to be distributed to shareholders. Many academicsfor example, Gary P. Pisano and Willy C. Shih of Harvard Business School, in their 2009 HBR article Restoring American Competitiveness and their book Producing Prosperity have warned that if U. S. companies dont start investing much more in research and manufacturing capabilities, they cannot expect to remain competitive in a range of advanced technology industries. Retained earnings have always been the foundation for investments in innovation. Executives who subscribe to MSV are thus copping out of their responsibility to invest broadly and deeply in the productive capabilities their organizations need to continually innovate. MSV as commonly understood is a theory of value extraction, not value creation. Executives Are Serving Their Own Interests As I noted earlier, there is a simple, much more plausible explanation for the increase in open-market repurchases: the rise of stock-based pay. Combined with pressure from Wall Street, stock-based incentives make senior executives extremely motivated to do buybacks on a colossal and systemic scale. Consider the 10 largest repurchasers, which spent a combined 859 billion on buybacks, an amount equal to 68 of their combined net income, from 2003 through 2012. (See the exhibit The Top 10 Stock Repurchasers.) During the same decade, their CEOs received, on average, a total of 168 million each in compensation. On average, 34 of their compensation was in the form of stock options and 24 in stock awards. At these companies the next four highest-paid senior executives each received, on average, 77 million in compensation during the 10 years27 of it in stock options and 29 in stock awards. Yet since 2003 only three of the 10 largest repurchasersExxon Mobil, IBM, and Procter amp Gamblehave outperformed the SampP 500 Index. The Top 10 Stock Repurchasers 20032012 At most of the leading U. S. companies below, distributions to shareholders were well in excess of net income. These distributions came at great cost to innovation, employment, andin cases such as oil refining and pharmaceuticalscustomers who had to pay higher prices for products. Sources: Standard amp Poors Compustat database Standard amp Poors Execucomp database the Academic-Industry Research Network. Note: The percentages of stock-based pay include gains realized from exercising stock options for all years plus, for 20032005, the fair value of restricted stock grants or, for 20062012, gains realized on vesting of stock awards. Rounding to the nearest billion may affect total distributions and percentages of net income. Steven Ballmer, Microsofts CEO from January 2000 to February 2014, did not receive any stock-based pay. He does, however, own about 4 of Microsofts shares, valued at more than 13 billion. Reforming the System Buybacks have become an unhealthy corporate obsession. Shifting corporations back to a retain-and-reinvest regime that promotes stable and equitable growth will take bold action. Here are three proposals: Put an end to open-market buybacks. In a 2003 update to Rule 10b-18, the SEC explained: It is not appropriate for the safe harbor to be available when the issuer has a heightened incentive to manipulate its share price. In practice, though, the stock-based pay of the executives who decide to do repurchases provides just this heightened incentive. To correct this glaring problem, the SEC should rescind the safe harbor. A good first step toward that goal would be an extensive SEC study of the possible damage that open-market repurchases have done to capital formation, industrial corporations, and the U. S. economy over the past three decades. For example, during that period the amount of stock taken out of the market has exceeded the amount issued in almost every year from 2004 through 2013 this net withdrawal averaged 316 billion a year. In aggregate, the stock market is not functioning as a source of funds for corporate investment. As Ive already noted, retained earnings have always provided the base for such investment. I believe that the practice of tying executive compensation to stock price is undermining the formation of physical and human capital. Rein in stock-based pay. Many studies have shown that large companies tend to use the same set of consultants to benchmark executive compensation, and that each consultant recommends that the client pay its CEO well above average. As a result, compensation inevitably ratchets up over time. The studies also show that even declines in stock price increase executive pay: When a companys stock price falls, the board stuffs even more options and stock awards into top executives packages, claiming that it must ensure that they wont jump ship and will do whatever is necessary to get the stock price back up. In 1991 the SEC began allowing top executives to keep the gains from immediately selling stock acquired from options. Previously, they had to hold the stock for six months or give up any short-swing gains. That decision has only served to reinforce top executives overriding personal interest in boosting stock prices. And because corporations arent required to disclose daily buyback activity, it gives executives the opportunity to trade, undetected, on inside information about when buybacks are being done. At the very least, the SEC should stop allowing executives to sell stock immediately after options are exercised. Such a rule could help launch a much-needed discussion of meaningful reform that goes beyond the 2010 Dodd-Frank Acts Say on Payan ineffectual law that gives shareholders the right to make nonbinding recommendations to the board on compensation issues. But overall the use of stock-based pay should be severely limited. Incentive compensation should be subject to performance criteria that reflect investment in innovative capabilities, not stock performance. Transform the boards that determine executive compensation. Boards are currently dominated by other CEOs, who have a strong bias toward ratifying higher pay packages for their peers. When approving enormous distributions to shareholders and stock-based pay for top executives, these directors believe theyre acting in the interests of shareholders. Further Reading Corporate Governance Feature Dominic Barton Steps for making capitalism stronger, more resilient, more innovative, and more equitable. Thats a big part of the problem. The vast majority of shareholders are simply investors in outstanding shares who can easily sell their stock when they want to lock in gains or minimize losses. As I argued earlier, the people who truly invest in the productive capabilities of corporations are taxpayers and workers. Taxpayers have an interest in whether a corporation that uses government investments can generate profits that allow it to pay taxes, which constitute the taxpayers returns on those investments. Workers have an interest in whether the company will be able to generate profits with which it can provide pay increases and stable career opportunities. Its time for the U. S. corporate governance system to enter the 21st century: Taxpayers and workers should have seats on boards. Their representatives would have the insights and incentives to ensure that executives allocate resources to investments in capabilities most likely to generate innovations and value. Courage in Washington After the Harvard Law School dean Erwin Griswold published Are Stock Options Getting out of Hand in this magazine in 1960, Senator Albert Gore launched a campaign that persuaded Congress to whittle away special tax advantages for executive stock options. After the Tax Reform Act of 1976, the compensation expert Graef Crystal declared that stock options that qualified for the capital-gains tax rate, once the most popular of all executive compensation deviceshave been given the last rites by Congress. It also happens that during the 1970s the share of all U. S. income that the top 0.1 of households got was at its lowest point in the past century. The members of the U. S. Congress should show the courage and independence of their predecessors and go beyond Say on Pay to do something about excessive executive compensation. In addition, Congress should fix a broken tax regime that frequently rewards value extractors as if they were value creators and ignores the critical role of government investment in the infrastructure and knowledge that are so crucial to the competitiveness of U. S. business. Instead, what we have now are corporations that lobbyoften successfullyfor federal subsidies for research, development, and exploration, while devoting far greater resources to stock buybacks. Here are three examples of such hypocrisy: Alternative energy. Exxon Mobil, while receiving about 600 million a year in U. S. government subsidies for oil exploration (according to the Center for American Progress), spends about 21 billion a year on buybacks. It spends virtually no money on alternative energy research. This article also appears in: Leadership and Managing People Book Meanwhile, through the American Energy Innovation Council, top executives of Microsoft, GE, and other companies have lobbied the U. S. government to triple its investment in alternative energy research and subsidies, to 16 billion a year. Yet these companies had plenty of funds they could have invested in alternative energy on their own. Over the past decade Microsoft and GE, combined, have spent about that amount annually on buybacks. Nanotechnology. Intel executives have long lobbied the U. S. government to increase spending on nanotechnology research. In 2005, Intels then-CEO, Craig R. Barrett, argued that it will take a massive, coordinated U. S. research effort involving academia, industry, and state and federal governments to ensure that America continues to be the world leader in information technology. Yet from 2001, when the U. S. government launched the National Nanotechnology Initiative (NNI), through 2013 Intels expenditures on buybacks were almost four times the total NNI budget. Pharmaceutical drugs. In response to complaints that U. S. drug prices are at least twice those in any other country, Pfizer and other U. S. pharmaceutical companies have argued that the profits from these high pricesenabled by a generous intellectual-property regime and lax price regulationpermit more RampD to be done in the United States than elsewhere. Yet from 2003 through 2012, Pfizer funneled an amount equal to 71 of its profits into buybacks, and an amount equal to 75 of its profits into dividends. In other words, it spent more on buybacks and dividends than it earned and tapped its capital reserves to help fund them. The reality is, Americans pay high drug prices so that major pharmaceutical companies can boost their stock prices and pad executive pay. Given the importance of the stock market and corporations to the economy and society, U. S. regulators must step in to check the behavior of those who are unable or unwilling to control themselves. The mission of the U. S. Securities and Exchange Commission, the SECs website explains, is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Yet, as we have seen, in its rulings on and monitoring of stock buybacks and executive pay over three decades, the SEC has taken a course of action contrary to those objectives. It has enabled the wealthiest 0.1 of society, including top executives, to capture the lions share of the gains of U. S. productivity growth while the vast majority of Americans have been left behind. Rule 10b-18, in particular, has facilitated a rigged stock market that, by permitting the massive distribution of corporate cash to shareholders, has undermined capital formation, including human capital formation. The corporate resource allocation process is Americas source of economic security or insecurity, as the case may be. If Americans want an economy in which corporate profits result in shared prosperity, the buyback and executive compensation binges will have to end. As with any addiction, there will be withdrawal pains. But the best executives may actually get satisfaction out of being paid a reasonable salary for allocating resources in ways that sustain the enterprise, provide higher standards of living to the workers who make it succeed, and generate tax revenues for the governments that provide it with crucial inputs. A version of this article appeared in the September 2014 issue of Harvard Business Review . William Lazonick is a professor of economics at the University of Massachusetts Lowell, the codirector of its Center for Industrial Competitiveness, and the president of the Academic-Industry Research Network. His book Sustainable Prosperity in the New Economy Business Organization and High-Tech Employment in the United States won the 2010 Schumpeter Prize. Securities Law Liabilities In Employee Stock Options As stock market prices soar, corporations rely increasingly upon stock options to serve as a form of currency to attract and retain sought-after employees. This practice is particularly important to development stage companies, such as Internet companies, with limited cash flow available, but the hope of an escalating stock market price, to serve as an incentive to attract qualified employees. This practice is further fueled by employees who have become more and more willing to forgo higher salaries for the potentially enormous opportunity for wealth that options to purchase securities issued by their employer may represent. Stock options are only as valuable as the stock underlying those options. What happens if the stock price of a company suffers a significant diminution in value due to an unexpected drop in earnings, an announcement of a restatement of earnings or accounting irregularities, a criminal investigation, or some other bad news Do employee option-holders have federal securities law claims against their employer akin to the claims possessed by the company39s public stock holders This article will explore the guidance issued by the Securities and Exchange Commission (quotSECquot) and recent case law that has addressed these issues. Employee Stock Option Plans Most option awards to employees are effected by means of an employee stock option plan that is implemented by the company, usually by its board of directors or a committee thereof. These plans authorize the company to award options to employees as part of their annual compensation or as a performance-based bonus. The terms of the options (including their price, vesting schedule and duration) are governed by the terms of the plan. The Securities Act of 1933 (the quotSecurities Actquot) and the Securities Exchange Act of 1934 (the quotExchange Actquot), as enacted, did not contain any reference to employee pension or profit sharing plans such as option plans. Indeed, the application of the federal securities laws to such employee benefits plans was quite unclear until the Supreme Court decided the case, International Bhd. of Teamsters, Chauffeurs, Warehousemen amp Helpers of Am. v. Daniel.1 Daniel addressed the question of whether an employer who creates an employee benefit plan has quotsoldquot a quotsecurity. quot This question is a crucial starting point in addressing employee stock option grants because if such a grant constitutes a quotsalequot of quotsecuritiesquot then: (1) the securities must be registered pursuant to the dictates of the Securities Act (absent an exemption) and (2) civil liability may arise for failure to comply with the registration and disclosure provisions of the Securities Acts or from false statements or omissions to state material facts in connection with such sales. In Daniel, the United States Supreme Court held that the receipt of securities in noncontributory pension plans does not involve a quotsalequot of securities under the Securities Act and the Exchange Act. In a quotnoncontributoryquot benefit plan, employees have no choice as to participation and make no direct contributions to the plan. Instead, an employer determines the amount to be contributed, and pays that amount directly to the plan on behalf of the employee. In this situation, the Court held that an employee benefit plan was not an investment contract because there was no investment of money by the employee. Instead, quotit seems clear that an employee is selling his labor primarily to obtain a livelihood, and is not making an investment. quot2 In reaching its conclusion, the Court focused on the extensive regulation of pension plans, including disclosure requirements, set forth in the Employee Retirement Income Security Act (quotERISAquot). Thus, the court concluded that the extension of the Securities Acts to cover pension plans would serve quotno general purpose. quot3 The quotNo-Salequot Doctrine Since Daniel, the SEC has clarified its position with respect to securities law regulation of employee benefit plans through a principle referred to as the quotno-salequot doctrine. Specifically, the SEC has made clear that the grant of securities to an employee pursuant to a noncontributory benefit plan is not a quotpurchasequot or quotsale. quot As explained by the SEC, quotthe basis for this position generally has been that there is no 39sale39 in the 1933 Act sense to employees, since such persons do not individually bargain to contribute cash or other tangible or definable consideration to such plans. It also is justified by the fact that registration would serve little purpose in the context of a bonus plan, since employees in almost all instances would decide to participate if given the opportunity. quot4 In contrast to involuntary, noncontributory employee benefit plans, such as discussed in Daniel, where a plan does involve a quotseparablequot investment of money as well as an expectation of profits, the SEC has reached a different conclusion - determining that employee39s voluntary contributions to such a plan would qualify as a quotpurchasequot of quotsecuritiesquot governed by the federal securities laws. In this situation, quotthe amount set aside for investment purposes can be readily identified by examining the contributions made by each individual participant. quot5 In identifying which types of plans would be deemed quotvoluntary and contributoryquot the SEC focused on plans that quotpermit employees to make a determination. whether they will invest their own money. quot6 The Impact Of Daniel And The quotNo-Salequot Doctrine On Securities Law Liability To possess standing to sue under Sections 11 and 12 of the Securities Act, a plaintiff must have quotacquiredquot a security issued pursuant to a misleading registration statement, or received an offer to purchase and actually purchased a security pursuant to a misleading or improper prospectus. Similarly, to state a cause of action under Section 10(b) of the Exchange Act or Rule 10b-5 promulgated thereunder, plaintiffs must (among other things) demonstrate that the defendant made misstatements or omissions of material fact in connection with plaintiff39s purchase or sale of securities.7 In essence, this quotpurchasequot or quotsalequot requirement mandates that to possess standing to assert a claim pursuant to Section 10(b), a security-holder must make an affirmative investment decision which is effected by the allegedly misleading disclosures. The SEC39s quotno-salequot doctrine as well as Daniel and its progeny have been cited by parties defending claims by employee stock option-holders arising in three scenarios under the federal securities laws. Specifically, this authority has been cited in response to lawsuits commenced by plaintiffs (i) who were granted options pursuant to an employee benefits plan, (ii) who individually negotiated an employment agreement, which includes stock options, and (iii) whose options are modified by the corporation. Application Of The quotNo-Salequot Doctrine To Holders Of Employee Stock Options Although there does not exist a large body of case law, the opinions that do exist have consistently held that mere participation in a noncontributory benefits plan does not satisfy the quotpurchasequot or quotsalequot requirement for a federal securities law claim. Thus, the holding by employees of options granted pursuant to a non-contributory benefits plan - whether or not the options have vested - has been determined not to satisfy the quotpurchasequot or quotsalequot requirement. This case law is consistent with the general principle that quotholdersquot of securities (as opposed to purchasers or sellers) do not have standing to assert a Section 10(b) Exchange Act claim.8 The most recent case to address this issue arises from the April 15, 1998 announcement by Cendant Corporation (quotCendantquot), disclosing its discovery of certain accounting irregularities. On the day following this announcement, Cendant39s stock price declined from approximately 35 to approximately 19. Predictably, numerous lawsuits were filed by security holders, including claims by former employees who had been granted options pursuant to Cendant39s stock option plan. In McLaughlin v. Cendant Corp.,9 the plaintiff was a former employee of Cendant and its predecessor, CUC International, Inc. (quotCUCquot). The plaintiff received her options pursuant to CUC39s employee benefit plan, and alleged that she was induced to accept the options on the basis of materially false and misleading financial statements. The defendants argued that the plaintiff39s acquisition of options was subject to the quotno-salequot doctrine and, consequently, that the plaintiff lacked standing to assert a Section 10(b) claim. The Court agreed. In dismissing the Section 10(b) claim, the court explained that Plaintiff did not receive her options as part of a bargained-for exchange that required her to make an affirmative investment decision. Though the plan stated that it was created to provide an incentive for employees to remain with Cendant, that language does not change the actual structure of the plan. Plaintiff39s participation in the plan quotwas an incident of employment and her only choice would have been to forego the receipt of benefits entirely. quot10 Stock Options Exchanged For Employment In contrast to those cases commenced by an employee who is merely a participant in a benefit plan, some decisions have held that the receipt of employee stock options may satisfy the quotpurchasequot or quotsalequot requirement for a Section 10(b) claim where an individual negotiates an employment package that includes a grant of stock options. For example, in Yoder v. Orthomolecular Nutrition Inst. Inc.,11 pursuant to an oral agreement, the plaintiff accepted employment with an issuer of securities in return for an annual salary of 40,000 plus options to purchase up to 30,000 shares of the issuer39s stock. In addressing a motion to dismiss the plaintiffs39 Section 10(b) claim, the court focused on the definition of the term quotsalequot or quotsellquot in the Securities Act to include quotevery contract of sale or disposition of a security, quot as well as the definitions of those terms in the Exchange Act to include quotany contract to sell or otherwise dispose ofquot securities. The court then concluded that the complaint alleged the existence of a contract for the sale of up to 30,000 shares of stock, falling quotwithin the letter of these statutes. quot12 Judge Friendly then went on to explain that: we perceive no reason why. Congress should have wished the courts to exclude from the benefits of facially applicable language a person who parts with his or her established way of life in return for a contract to issue stock. As the Supreme Court has noted in a similar context, quotthe economic considerations and realities present. are similar in important in respects to the risk an investor undertakes when purchasing shares. Both are relying on the value of the securities themselves, and both must be able to depend on the representations made by the transfer of the securities. quot13 Thus, in Yoder and similar cases, the courts have focused on the affirmative decision by the prospective employee to accept a compensation package that includes stock options as consideration for the individual39s agreement to accept employment at the company. As a result, the court concluded that there existed bargained for consideration for the options - the agreement to accept employment and therefore a quotpurchase. quot Modification Of Options A further issue arises where employee stock options are modified by the issuer. In cases arising in this situation, plaintiffs argue that the option-holder39s quotacceptancequot of the terms of the modified option constitute a quotpurchasequot of securities. A second case arising from Cendant39s disclosure of accounting irregularities is illustrative. Specifically, in Wyatt v. Cendant Corp.,14 plaintiffs sought to represent a class of former employees of CUC. In that case, at the behest of the Federal Trade Commission, CUC decided to divest its Interval Holdings, Inc. subsidiary in connection with its merger with HFS Incorporated. According to the complaint, prior to the divestiture, Interval39s management negotiated with CUC to obtain incentives to encourage the continued services of its employees. Among other things, the terms of plaintiffs39 options as to vesting and the time in which holders could exercise the options were modified in connection with the divestiture. Plaintiffs first argued that they satisfied the quotpurchasequot or quotsalequot requirement, because they were induced to stay at Interval based upon the expectation of receiving modified options. In rejecting this argument, the court explained that, following the divestiture, quotplaintiffs remained as at-will Interval employees with the same responsibilities and compensation they had pre-divestiture. Consequently, plaintiffs do not plead the existence of any 39specific consideration39 or added value that they each provided in the pre-divestiture period traceable to the option modifications. quot15 Plaintiffs next argued that the option modifications were voluntary and they had made an quotinvestment decisionquot because a letter from Interval purportedly gave them the ability to accept or reject the modification of the terms of the options. The court also rejected this argument, explaining that: when a group of employees is offered options (or option modifications), an eligible employee does not make an individual affirmative quotinvestment decisionquot if he or she chooses either to participate in the plan or to reject it. Such is the case here. The only alternatives available were pre-ordained by CUC. Plaintiffs did not make any quotindividual affirmative decisionsquot to trade quotparticular consideration in return for a financial interestquot merely because they plead that they could have accepted a different form of modification.16 A similar result was reached by a New Jersey State Court in Hecht v. Papermaster.17 In that case, B. S.G. Corporation, the employer of plaintiffs, was acquired by Medaphis Corporation. The plaintiff employees were given the ability to exchange their options in the acquired company for those of the acquiring company. Plaintiffs brought claims, inter alia, for alleged violations of Section 11 and 12 of the Securities Act based on modifications made to their options in connection with the merger. The court concluded that plaintiffs did not allege the existence of a quotpurchasequot or quotsalequot subject to the registration requirements of the Securities Act. As the court explained, quotwhile plaintiff39s B. S.G. stock options were exchanged for Medaphis stock options. this Court simply cannot conclude that plaintiff gave up valuable consideration in exchange for the Medaphis options. quot18 The court went on to explain that quotbecause the conversion of the options at issue did not allow for any choice by the optionholder, that is the options were converted automatically with no opportunity for the optionholders to withdraw funds and decide whether to reinvest, quot no purchase or sale had occurred supporting a federal securities claim.19 In the context of the federal securities laws, there exists only limited authority relating to the liability of issuers and their directors to individual employees granted stock options. However, recent case law provides certain guidance as to the availability to option-holders of a private cause of action against issuers under the federal securities laws. Three general principles may be extracted from those cases: Employees granted stock options pursuant to a noncontributory employee stock option plan do not satisfy the quotpurchasequot or quotsalequot requirement necessary to assert a claim pursuant to the federal securities laws based solely on their status as holders of options. Employees who obtain options as a material part of a compensation package included in an employment agreement, particularly where such package induces the employee to join a company, may have a claim. In connection with a modification to the terms of employee options, the court will consider whether the option-holders were required to make an affirmative investment decision and to provide consideration for the modification to determine whether the quotpurchasequot or quotsalequot requirement is satisfied. In light of the extensive use of employee stock options, particularly by corporations in the development stages, an increase in claims by holders should be anticipated, which will further clarify these principles. 1. 439 U. S. 551 (1979). 2. Id. at 560. 3. Id. at 569. The responsibilities of a corporation and its directors to participants in a pension or defined contribution plan under the ERISA laws falls beyond the scope of this article. 4. 19 SEC Docket at 465, at 5, 1980 WL 29482, at 15 (Feb. 1, 1980). See also Compass Group PLC, SEC No-Action Letter, 1999 WL 311797 (May 13, 1999) (quotwhen an employee does not give anything of value for stock other than the continuation of employment nor independently bargains for such stock, such as a stock bonus program that involves the award of stock to employees at no direct cost, quot the quotno-salequot doctrine applies). 5. See Release No. 33-6188, 19 SEC Docket at 465, 1980 WL 29482, at 9. 6. Release No. 33-6281, 21 SEC Docket at 1372, 1981 WL 36298, at 2. 7. Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723 (1975) see also In re International Bus. Machs. Corp. Sec. Litig. 163 F.3d 102, 106 (2d Cir. 1998). 8. See, e. g. Krim v. BancTexas Group, Inc. 989 F.2d 1435, 1443 n.7 (5th Cir. 1993) (noting quotwell establishedquot principle that quotmere retention of securities in reliance on material misrepresentation or omissions does not form the basis for a Section 10(b) or Rule 10b-5 claimquot) Gambella v. Guardian Investor Servs. Inc. 75 F. Supp. 2d 297, 299 (S. D.N. Y. 1999) (quotRule 10b-5 only protects defrauded purchasers or sellers. Both the Second Circuit rule and the Supreme Court39s decision in Blue Chip Stamps have been subsequently interpreted to limit suits by individuals who allege that they were induced to retain securities by a defendant39s fraudulent conduct. quot). 9. 76 F. Supp. 2d 539 (D. N.J. 1999). See also Childers v. Northwest Airlines, Inc. 688 F. Supp. 1357, 1363 (D. Minn. 1988) (dismissing a Section 10(b) claim on behalf of participants in an ESOP quotplaintiffs39 participation in the ESOPs cannot be characterized as a 39purchase39 of a security since participating employees did not furnish valuequot) Bauman v. Bish, 571 F. Supp. 1054 (N. D. W. Va. 1983) (holding that quotno offer, sale, or purchase occurs with the operation of an ESOP as contemplated by the securities laws. quot). 10. 76 F. Supp. 2d at 545 (citations omitted) (quoting Childers, 688 F. Supp. at 1363). But see Feret v. CoreStates Fin. Group, No. Civ. A. 97-6759, 1998 WL 42650, at 14 (E. D. Pa. July 27, 1998) (holding in a two paragraph discussion of the issue that options granted to participants in a long-term incentive plan satisfied the quotpurchasequot or quotsalequot requirement). 11. 751 F.2d 555 (2d Cir. 1985). 12. Id. at 559. 13. Id. at 560. See also Rudinger v. Insurance Data Processing, Inc. 778 F. Supp. 1334, 1338-39, (E. D. Pa. 1991) (quotAn agreement exchanging a plaintiff39s services for a defendant corporation39s stock constitutes a 39sale39 under the terms of the Securities Exchange Actquot) Campbell v. National Media Corp. No. 94-4590, 1994 WL 612807 (E. D. Pa. Nov. 3, 1994) (finding that grant of options to Chief Executive Officer to purchase 50,000 shares pursuant to an employment agreement was a purchase of securities). 14. 81 F. Supp. 2d 550 (D. N.J. 2000). 15. Id. at 556-57 (citations omitted). 16. Id. at 558 (quoting Childers, 668 F. Supp. at 1363). 17. Transcript opinion, Docket No. L-12961-96 (N. J. Super. Ct. Law Division May 12, 1998). 18. May 12, 1998 tr. at 80-81. 19. Id. at 81.