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KPMG Stock Option Survey

A KPMG study of the expensing of stock options as being considered by the Council on Corporate Disclosure and Governance, and applied to Singapore-listed companies with stock option plans, has found that its impact on financial statements will not be of huge significance. However, differences in the assumptions made in calculating stock option expense can result in strong variations in the reported financial results of individual organisations. The survey questions the efftectiveness of using stock options as a tool to align the interests of employees with the long-term interests of the organisation; and identified the key problem to be how options are valued.

Some key findings of the survey are:

• Of the 429 companies with primary listings on SGX, 58% had employee stock option plans. 51% had issued options which were outstanding at the latest balance sheet dates of these companies. This is different from the US experience, where virtually every company in the S&P 500 uses stock options.
• As a result of SGX restrictions on the use of stock options, the effect on expensing options is relatively small. The outstanding options in issue would have resulted in a total expense of $510 million for all listed companies in the latest financial year. This would on average reduce reported profits by 4.4%.
• By other measures, the effect of the use of stock options is also moderate. As a proportion of staff costs, option expense accounts for 4.2% of staff costs of all survey companies. If all outstanding options were exercised, the dilution of existing shareholders interests amounts to only 2.2%. This compares with a reported 7% dilution for large US corporations.
• Stock options held by directors account for 22% of all outstanding options, reflecting SGX limits on directors’ holdings.
• In general, options are used by Singapore companies moderately, with SGX imposing limits on their use and a significant Singapore tax disincentive. Abuse of stock options, if any, and overstatement of profit seem limited.

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