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Accounting Allah shmoop measuring expenses All right people Well someday

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every single person taking this video course is going to

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have a dream Okay nightmare of having to be the

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accountant who audits the CEO of a successful public corporation

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before you dive too far down the well in that

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adventure let's focus on how she actually gets Ade We're

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going to make up an example of a compensation package

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for a CEO in a reasonably large company that's gone

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public and has been required to hire a new CEO

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after the old ones diet of burgers fries and cigarettes

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Well finally caught up to her Our company has one

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hundred million shares outstanding and the current stock price is

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twelve bucks a share The CEO probably makes half a

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million dollars in cash and bonus money for year and

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likely got a stock option grant for something in the

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realm of I'll call it two million options Very simply

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if the stock goes to twenty dollars a share she

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will have made eight dollars a share of gain over

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that twelve dollars a share Current price there if she

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sells all two million options After four years of working

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in a company investing into that ownership stake She will

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have taken in sixteen million dollars and appreciated gains from

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stock option sales which the I Rs streets as ordinary

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income compensation Yes that's a lot of money to be

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paid for a stock price which appreciated at only a

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modest rate of two bucks a share for four years

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It's good but probably not sixteen million dollars Good Imagine

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how hard A you know a proctologist has to work

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for that kind of money The questions here revolve around

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the accounting treatment for how these expenses are measured The

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quick some is that if she were the only one

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in the company with options well then subsequent to her

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leaving the company then has one hundred two million shares

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outstanding instead of one hundred million right She converted those

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two million into shares The company made twelve bucks sharing

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cash on the conversion Got it Let's review here So

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going forward in order to earn a dollar a share

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of the company now must earn one hundred two million

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in dollars instead of one hundred million dollars not next

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year on Lee but forever The company however has gained

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twenty four million dollars in cash That is when the

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CEO converted her shares from being options She bought him

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out at twelve bucks each times two million options They

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became twenty four million in cash And then she took

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home the rest right Well that was a one time

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payment cash to the companies such that CEO bought out

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her two million options Well Buck siege right there for

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total check to the company Twenty four million dollars But

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one second later she turned around and sold those shares

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through her kindly loving stockbrokers at Goldman Sachs are Morgan

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Stanley or whoever for twenty dollars a share marking up

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her eight dollars a share profit Okay quick visual recap

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Here's the sitch Pre vesting aren't that original Shares Hundred

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million Original stock price Twelve Original Mark cap 1 . 2 billion

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grant the ceo two million often twelve hour strike and

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after vesting vesting four years stock price goes up twelve

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dollars twenty eight dollars game seo pays twelve dogs of

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comedy writing checks from burning and goldman sachs whoever seo

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sells two million shares down twenty nine eight dollars share

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gain total getting ceo even told new shares outstanding new

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stock price point out share new market cap All right

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let's focus on this tax consequence here as well For

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the company which is actually positive the company books as

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an expense The spread from twelve dollars to twenty dollars

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on her options or an expense charged to labor costs

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of two million shares times eight dollars in gain Or

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that sixteen million that she was aid So stock option

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payment plan for CEOs has come under great criticism in

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recent times because the CEO carries almost no financial risk

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in having been granted those options As a result a

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new form of equity based compensation has become popular wherein

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the CEO is granted shares of the company instead of

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stock options on the shares of the company Right Well

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specifically those shares are called rs use or restricted stock

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units Well they get treated from attacks perspective as if

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they are simply cash Well the timing investing of the

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our issues allows for mitigation ocean of some of the

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tax expenses here Well if you're really interested in the

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details of these tax consequences of stock options and our

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issues Well then eh we're really sorry Yeah and B

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we think it wise to find a hobby and see

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Well it's highly likely you will end up being an

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awesome accountant Yeah we actually love this stuff We'd spend

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all day talking about taxes but all right we're done

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