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Article Summary
The article that has been chosen for the purpose of this paper is the article titled The Hidden Cost of Stock Options by Laura Cohn, from the Business Week. This article basically analyses the stock options available in the market and how they are being abused. The article reports that from a study of with 1,300 companies as respondents it was discovered that in 1999 about 13 percent of the employees of the responding companies were liable for stock options.
This meant that the companies were exercising the use of stock options without actually knowing the effect that it has on the earnings per share of the entire stock. In actuality when the employees of a company exercise their stock options the value of the total stock remains the same while the volume or the number of stocks increases. This means that the company has to do this by buying the shares form the market or by issuing new stock into the market.
The consequent result of these actions on the part of the company makes the stock of the company more diluted as the value of the shares and the profits are spread over a larger volume of the shares, making the earnings per share for the shareholders to decrease with the increasing spread. This has a detrimental effect on the stock price in the market as well making the value or the price of the share in the market to be decreased in the long term.
The article however also provides that the labor market is very competitive in terms of skills and they are demanding higher remuneration. As a result it becomes insufficient to be able to support the high skilled labor and employees of a company at their current compensation. The compensation in the long term will have to be increased by the companies in order to retain the employees. However the higher salaries also have the risk of lowering the earning per share through higher expenses and lower profits, resulting in a consequent drop in the market share price as well.
To depict this the article aptly states But what will happen if stock prices sag and options no longer pay so well? If we go into a bear market, companies may have to rethink this, says Peter T. Chingos, head of the executive compensation practice at compensation consultant William M. Mercer Cos. Rethinking options programs may mean going back to offering even higher salaries, which do show up on corporate balance sheets. On the other hand, employee demands for higher compensation during a slow economy will also sag. (Cohn, 1999)
Article Critique
The article has been well written as the author specifically provides to the customers in the beginning of the paper that the main objective of the article is to highlight and identify the hidden costs of the stock options for the company in the sh9rt and the long terms. The article initially presents the background on the stock options and the laborer market which has relevance in raising the need and the costs of the stock options.
The article then builds up on this information and supports the theories discussed in the paper through national economic statistics and literature review of research conducted on the matter. Additionally the article also does make use of logical reasoning to develop the concept and establish the concept of hidden costs for the readers, making them come up to the level of intellectuality and comprehension required for the topic.
The strength of the paper that has been chosen for critical review is that the article enhances the understanding of the stock options in context of its costs as well as its disadvantages and advantages to the company. Moreover the reality of the stock options is revealed to the audience through the paper. The reliance of the author of the industry research and the use of professional opinion give the article additional claims to strengths. The weakness of the article however is that the stock option is not defined in the article. While background on the need for stock options and their use id provided no specific definition is provided which makes it difficult to understand for the audience who are unaware of what stock options stand for to determine what aspect of cost accounting is being dealt with in the article.
Aside form this the article is also relevant in the real life for people as the concept of stock options which is discuss and highlighted in the paper and their costs do exist in reality. The paper as a result is able to provide the current managers as well as the students about the specific latent costs that are associated with stock options and why still the industry deems them a much better approach than to provide their employees with higher salaries. The article in whole and in the overall context is useful for the readers as it equips them with a better understanding of the stock option, how they work and what apparent and hidden costs are present. They are much better equipped for decision making according to the cost benefit analysis on the information provided.
References
Celarier, Michelle, The Hidden Option Cost , Euromoney, Issue 342, p12-14, 2p, (1997). Web.
Cohn, Laura, The Hidden Costs of Stock Options , Business Week, Issue 3658, p. 44-44, 4/5p, 1 chart, 1 graph, (1999). Web.
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