Against Options

I have been on the fence for some time now on the debate over expensing options. On the one hand, they do reflect a real cost and should be accounted for, but on the other hand, if all the relevant information is disclosed somewhere, they don't really need to be on the income statement. Investors can figure out the value themselves. This article by Geoffery Colvin has put me in the anti-options camp.

Options' most rabid supporters note that in the '90s employers handed out more stock options than ever, and stocks rose higher than ever: Behold the power of options. In fact, though, the causation is the reverse of what's implied. Comp consultants admit privately that in a roaring bull market employers get generous with options because it's an easy way to make top executives rich and keep employees happy.

That's a good point. It's pretty obvious, so I don't know why I never realized it before. Options don't really do what supporters claim they do. If options raised stock prices, companies should be pouring them on right now so that their stock would go up. But options are really just a way to reward people using the already high stock price instead of cash. That is why option grants were so prevalent during the late 90s boom.

I think options do have a rightful place – mainly in startups who are low on cash but need to reward employees. But for stable mature companies, they should be expensed, or other methods of compensation should be used.