More than 900 companies have used accelerated vesting schedules to avoid an estimated $8 billion in option expense costs, according to a Bear Stearns report released in late August.Beginning with their 2006 fiscal year, companies will be required to subtract the cost of stock options from profits as employees attain the right to cash in their options, a process known as "vesting" that normally stretches over four years. Since Bear Stearns released a report in January, more than 150 companies have accelerated their options vesting - essentially wiping the options off the books before the new accounting rule goes into effect.
The report said that companies are typically choosing to accelerate the vesting of "underwater" options, which are currently worthless, but still must be expensed.
The top three industries accelerating the vesting of options are technology (33 percent), health care (17 percent) and finance (17 percent). The five largest companies, by market cap, that accelerated vesting were JP Morgan Chase, Comcast, News Corp., Dell and Corning. However, Bear Stearns also calculated which companies would gain the most from accelerating vesting - or, the 25 companies with the largest future stock option expense to record. Topping that list were Dell ($591 million in accelerated expenses), Sun Microsystems ($400 million), STMicroelectronics ($280 million), CBS ($263 million) and Whole Foods Market ($202 million).
For companies that granted a similar dollar value of stock options and restricted stock in 2006, compared to historical amounts, the report said that, "There is a greater likelihood that option-vesting acceleration was used to temporarily boost reported earnings." If used as a temporary tactic, the study said that future earnings may need to be adjusted down to reflect a normalized level of stock-based compensation.
