Accounting For Stock Based Employee Compensation: A Continuing Controversy

Abstract

Stock options represent an increasingly significant component of executive compensation. Theoretically, the inclusion of stock options in executive compensation contracts motivates managers to take actions that increase the market value of the firm's stock. Accounting standards regulating the treatment of stock options continue to be controversial. The focus of this paper is to examine the accounting treatment of stock options. We begin by outlining the controversial history of accounting for stock options.  Next, we examine the alternative accounting treatments for stock option.  Finally, we critique the proposed changes to the methods of accounting for stock options.