Stock Options Redux

Michael Mandel

Here's my argument against the expensing of stock options (laid out originally in my book from last year, Rational Exuberance).

Accounting today makes a sharp distinction between workers and shareholders. Workers receive wages, which are deducted from revenues. Shareholders receive dividends and capital gains.

The whole point of stock options is to blur the difference between the two categories. Stock options motivate workers by offering them a "piece of the action"--in other words, to give them a share of the same returns as the shareholders.

The whole point of expensing of stock options is to take the cost off the balance statement and put it on the income statement--in other words, to make sure that everyone knows that the stock options are a labor cost. Expensing serves no other purpose.

Forced expensing of stock options sends a clear signal to workers that no, they are just workers. And it sends a clear signal to shareholders that yes, the workers are just workers.

That may be reassuring to shareholders, but it's anti-motivational to workers. The way you get innovation is by motivating people to take risks, and that's just not going to happen the same way if workers are squished back into their boxes again.

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