FASB on Expensing Stock Options

David Foster has an interesting post on the FASB draft proposal for expensing stock options. He is obviously very much against it. He lists three reasons why, then sums up with this:

I've seen more than one statement in the media to the effect that: "Options represent a massive wealth transfer from shareholders to corporate officers and employees." What a strange viewpoint! Don't those corporate officers and employees have something to do with creating that wealth? How much would the corporation (and its stock) be worth without those officers and employees? I'm a capitalist and an investor–but capital by itself is sterile; it also needs intelligent, innovative, and motivated people to put it to work.

This is a tough issue. Ultimately, it shouldn't matter. As long as information about the options is made public, educated investors should be able to evaluate the effects of the grants on their own. But we all know there are plenty of people focused on EPS and only EPS. Expensing stock options could have a much different effect than the dilutive effect of the options, depending on how the option value is calculated, and will probably lower EPS. It reminds me of when "low fat" foods first came out. Some of the foods were lower in fat, but actually had more calories – yet people bought the "low fat" thinking they were eating healthier. They were so focused on one thing they ignored the bigger picture. So in some ways, I say it doesn't matter what they do. The purpose of accounting is to put an economic face on a business, and accouting is an imperfect science. Either way, savvy investors will still dig into the financials to figure out how healthy the company is as a whole.

That said, David makes some very good points. Options play a huge role in economic growth and expensing them could hurt small companies. The problem is that options are a great idea, they are just misused, overused, and manipulated in certain instances (should we really re-evalute everyone's options just because the stock keeps falling? Hell no, make them get it back up).

Let's not forget part of the reason this all happened in the first place. Congress decided that CEOs made too much and passed a law that salaries over 1 million dollars got unfavorable tax treatment. So boards paid 1 million in salary, and relied more on other forms of compensation, like options. Politicians tried to stop and economic force and all they did was re-direct it. Now they don't like the outcome. And they still haven't learned their lesson.

This is definitely an important topic worth discussing in much more detail, but for now I fall on the side of ambivalence.