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The Stock Options Controversy And The New Economy

Issue Analysis

Title

The Stock Options Controversy And The New Economy

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Pressure is growing on companies to treat grants of stock options to employees as compensation expenses for purposes of financial accounting.

This idea is a bad one. Proposals to expense options ignore: (1) The rising importance of intellectual property and other intangible assets as determinants of corporate value; and (2) The role of options in neutralizing problems of information asymmetry in technologically complex industries.

These proposals also assume away significant problems in valuing stock options and raise serious concerns about tax accounting and tax rates. Nor are the proposals necessary, because legitimate issues presented by option grants can easily be remedied by improved disclosure, a change already underway.

The pressure to require that stock options be accounted for as expenses seems motivated as much by political as by accounting concerns. Those exerting it are aware that the proposed changes would discourage grants of stock options to broad classes of employees, and this is the result they wish to achieve. They also demonstrate a rigidity of thought reminiscent of the New Deal Era: There is labor and there is capital, and never the twain shall meet. The ambiguities of those categories in the Information Age get no attention.

As was recently noted, “Without institutions to bring together people with resources and people with ideas, new ventures can be launched only by the narrow circle of people who have both.” Options are just such an institution, and an important one, and the proposals to treat them as expenses would meddle destructively with a complex financial and entrepreneurial ecosystem.