|The Declarer (Floyd McWilliams' Blog)|
Sunday, March 07, 2004
three people wrote letters advocating that stock options be expensed. If these are the best arguments that the pro-expense side can muster -- and they do seem fairly typical of what I have seen elsewhere -- then it would appear that the pro-expense faction has a very poor case.
The debate over stock options concerns what large corporations report to the owners of their stock. Whining about rich people in this context is silly. Is there some accounting scheme under which corporate executives would not make vastly more money than ordinary employees?
So Roston wants to make expensing of stock options conditional upon implementation of various reforms advocated in Das Capital. Well that is exactly what I want as an individual investor! I can compare companies ABC and XYZ, and purchase ABC because XYZ's financials are inferior. Later I find out that XYZ had different accounting standards than ABC, because XYZ did not believe that it was as important to retain receptionists as it was to keep their CTO.
Certainly stock option grants are valuable forms of compensation. But are they forms of compensation which represent expenses for the company? The one does not necessarily imply the other. Consider that my employer recently named a "Quality Employee" of the year. This was compensation -- the employee was certainly gratified to be recognized as a key performer -- but it did not cost the company money.
Microsoft employees enjoy the benefit of discounts on Microsoft software. This is a form of compensation, but I would be very surprised if it appeared on Microsoft's books.
Shekita's assertion that options have a "real cost to companies" is the exact opposite of the truth. I am due to vest options next month. Let's say that I exercise 1000 options at $3 each. I will write a check to my employer for $3000. How is this a cost? Option grants affect shareholders by diluting their holdings, and shareholders are not informed as to the extent of the dilution by reading a balance sheet that shows increased expenses.
It is true that corporate employees are free to sell their options. But they are also free to sell anything else that they own. A homeowner is free to sell his house whenever he feels like it; does that mean that public policy designed to promote individual home ownership is a fraud?
Now it is true that stock option grants allow employees to choose a time when they can buy and sell their stock. But how is that significantly different from me deciding to sell other stock that I own because I think it is at a high? And short-term gains are taxed more heavily than long-term gains, so employees have an incentive to acquire and hold their stock, rather than make a quick sale.
Smathers says that stock options encourage their holders to "boost stock price in the short-term by any means, legal or otherwise." This is true, but hardly profound. Any other metric of performance would encourage short-term manipulation of that metric. We focus on the short-term because it is hard to predict the long-term. (It's a good thing, in this context, that option grant holders can choose when to exercise their options. If they could cash in only on a specified date, there would be more incentive to manipulate the stock price.)