Let Stock Options Stand And Be Counted
The most priceless perk in the bag of goodies available to an executive is the stock option. To some corporate chieftains, it can be worth tens of millions of dollars. Some of these gains are richly deserved and reflect just rewards for a job well done. Many of them are the result of friendly boards being overly generous with option grants to CEOs who appointed them.
Truth is, boards would hand out options more wisely and fairly if accounting rules assigned a value to them that was charged to a company's earnings. The Financial Accounting Standards Board is about to decide whether to go ahead with a proposal that does just that. But FASB is under heavy pressure to ignore the fact that stock options have real value. It should be strong and resist that pressure.
Big and small companies, their accounting firms, and their pay consultants--even the two most prominent shareholder advocacy groups--oppose charging the value of options directly to earnings. They argue that expensing options, by lowering reported profits, will cut into stock prices and cramp their ability to raise new capital. They also say that pricing models used to value long-term options are inaccurate, despite their seeming precision. So why bother to value them at all?
The reason is simple: Options have real value. We agree with investor Warren E. Buffett, perhaps the most vocal proponent of an accounting charge: "If options aren't a form of compensation, what are they?" he asks. "If compensation isn't an expense, what is it? And, if expenses shouldn't go into the calculation of earnings, where in the world should they go?" Amen.
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