What opponents of expensing argue and why they are wrong

Options are too hard to value
Expensing options takes them away from rank-and-file employees
Stock options are the engine of prosperity and innovation

Options are too hard to value

Opponents of expensing argue that since options are difficult to value, attempting to value them is an inaccurate science that would introduce unnecessary inaccuracies into financial statements. As expensing opponent Sen. George Allen (R-Va.) put it: "I'm not convinced there is an adequate way to value a stock option."

It is true that there is no perfect way to value options. But just because there is not a perfect system of valuation does not mean that options do not have value. If options were put on the open market, they would certainly have a value. If options did not have a value, executives would not be so eager to receive them.

Furthermore, corporations seem to have found a way of valuing options when they take tax deductions for expenses. If options have a value when they are counted as a tax deduction, why do they not also have a value when they are granted. Corporations routinely make educated guesses in their accounting. For example, should corporations stop calculating the useful life of machinery or the pension expense just because there is not an exact formula?

There are a number of competing models for valuing options. The Financial Accounting Standards Board (FASB) is currently trying to figure out how best to account for the expense of options.

 

Expensing options takes them away from rank-and-file employees

Opponents of expensing argue that real victims of expensing will be the rank-and-file employees. If companies have to expense options, they will stop giving them out to employees who are "trying to climb the ladder," as expensing opponent Sen. Barbara Boxer (D-Calif.) put it.

This is the kind of idle threat that corporations have made in response to nearly every regulation that would cut into their profits over the years: that the real losers will be the workers. But the argument is based on a false premise. Most rank-and-file employees do not get stock options in the first place, so there is nothing to take away from them. According to the Bureau of Labor Statistics, only 1.7% of non-executive employees get options in the first place. The vast majority of options are concentrated among executives and managers. According to Business Week 80% of the stock options value goes to the most senior executives

Almost 200 companies have already started to expense options. Those that gave out broad-based options before expensing, like Home Depot and Wal-Mart, have continued to distribute broad-based options.

If corporations want to keep attracting talented employees, they will find a way to offer incentives, even if they have to account for the costs honestly.

 

Stock options are the engine of prosperity and innovation

Opponents of expensing argue that stock options have driven innovation in this country by allowing start-up companies to attract employees and invest them in the company's future. If options have to be expensed, innovation in this country would dry up.

This argument is based on the faulty premise that companies would stop issuing options if they had to be expensed.

However, if we take the argument at face value, it cynically suggests that the only way that innovation can take place in this country is if we loosen our accounting standards and allow companies to issue misleading financial statements. Do opponents of expensing really think that entrepreneurship and innovation should depend on maintaining devious accounting standards?