To expense stock options or not
The debate on expensing stock options rages on.
In the last few years, few subjects have achieved such a high level of debate as the issue of expensing stock options. Some companies, like Intel, are famous for not expensing options, while people like super investor Warren Buffett have promoted the idea of counting options as an expense.
How do stock options work?
Generally, employees are give the right to purchase stock at a later date, for the amount that the stock costs on the day they are granted the option. If the stock is selling for $108 5 years later, and the cost was $10 when the option was granted, then the employee could simultaneously buy the stock for $10 will selling it for $108 and pocket the $98 difference! As you can see, stock options are very lucrative.
What is the controversy with expensing stock options?
The controversy involves how companies account for stock options. Generally, no provision is made to expense the options, although they end up as a major form of compensation to employees. Opponents of the current method state that not expensing the options leads to inflated profits and less value to shareholders.
"Write your congresspeople giving them your views on whether options should be expensed," says Warren Buffett. "It was a disgrace 10 years ago when Congress bludgeoned the SEC and the Accounting Standards Board to override FASB's decision to expense options. It accelerated the anything-goes mentality of the 1990s."
"It seems there was a fellow who discovered some new relationship between circumference and diameter that would help students learn a better kind of geometry, so he wrote a law to change the value of pi from 3.14159 etc. to 3.20. It passed the Indiana house -- until the Indiana senate finally thought better of it."
"The U.S. Senate concluded that the world was flat, because their their contributors paid them enough to say the world was flat."
Charlie Munger: "It's worse than that. Those people who wanted to round pi to 3.2 were stupid. These people are worse than stupid. They know it's wrong and want to do it anyway."
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