Current accounting rules specify that companies must recognize the cost of compensating employees through stock options (ESOs) on the income statement as part of share-based compensation expense.

Required:

a. Briefly describe the accounting for ESOs.

b. Why is there a cost when a company grants ESOs with an exercise price equal to the current market price?

c. Critics claim that ESO accounting recognizes the costs but not the benefits that arise from granting ESOs, such as improved employee motivation and employee retention. Is this true?

d. Discuss how you would deal with the compensation expense arising from ESOs if you were (1) an equity analyst and (2) a credit analyst.