The theory holds so long as the executives hold on to the shares. Once they have sold them, there is no longer a commonality of interests. In Enron's case it seems the executives were too interested in boosting the share price, at least for a while - hence the use of off-balance-sheet partnerships and other practices to hide debt and give needed jolts to quarterly earnings. .
Granting stock options (the right to purchase shares of the employer's stock at a predetermined price) is a way to pay employees. Compensation for services is, of course, an expense that has to show up on the employer's profit-and-loss statement. When payment is made in cash, it is easy to figure out how much the expense is and when it should be charged. The use.
of options makes the time of the expense and its amount more obscure.
Suppose that a company sells stock outright to an employee. It is no surprise that GAAP calls for booking an expense, at the time of sale, equal to the excess of the fair market value of the shares over their purchase price. If the two amounts are equal, the expense is zero. Nothing that happens after the sale affects corporate earnings or is reported anywhere. Should the stock value increase a thousand fold, the public will envy the investment acumen and perceptivity of investor "X" (Bill Gates for example), but no one will denounce him on account of his stockholder profits as an "overpaid CEO". .
The aftershocks of Enron's bankruptcy have attracted the attention of the global financial community. Its downfall has left many stakeholders and creditors significantly poorer. Consider that Enron's shares stood at $83 apiece at the beginning of this year, and have ended at 26 cents per share. The total shareholder value that has been wiped out in the meltdown amounts to $60 billion. Among the stakeholders in Enron who have lost a significant role, particularly miserable are its employees, who had tied their pension fund savings, at the company's instance, to investments in Enron's own shares.
