Therefore, it provides a lower return to option holders. Yes, the value of option grants is illiquid and, yes, the eventual payoff is contingent on the future performance of the company.
The ability to buy shares at a significant discount to the current market price a bargain price, in other words is viewed by the IRS as part of the total compensation package provided to you by your employer, and is therefore taxed at your income tax rate.
But a common mistake is not realizing the significance of time value, even on the grant day, and the opportunity cost of premature or early exercise. Likewise, a decrease in stock price reduces the value of future option grants.
The executive with options, however, has essentially been wiped out. In my view, the worst thing about the current accounting rules is not that they allow companies to avoid listing options as an expense.
What are you doing differently? As executives at a company receive yearly option grants, they begin to amass large amounts of stock and unexercised options.