Tech companies have been able to hire and keep the best employees because they typically have compensated them generously. There’s no question that stock options have been a significant part of those compensation packages.
There is a question, however, of how companies treat stock options. Should they be required to treat options as an expense that is reflected in the financial statement, as many advocate? Or should the treatment be left to the discretion of the company within the bounds of accepted accounting principles, as it is now?
But if you consider that stock options aren’t even compensation, then that question is easily answered.
“They represent risk-sharing profits that workers receive on top of their normal market wages and benefits,” say Joseph Blasi, Douglas Kruse and Aaron Bernstein, authors of “In the Company of Owners: The Truth About Stock Options (And Why Every Employee Should Have Them).”
“As such, it makes little sense to deduct the value of those options from profits. Unlike wages, which companies must pay out in cash, options require no expenditure by the corporation.”
The Financial Accounting Standards Board (FASB), an independent accounting standards and rule-making body, issued proposed rules in March that require companies to expense employee stock options as compensation.
Expensing stock options should be a choice each company is free to make on its own. If employers are forced to expense employee stock options, they would be less likely to offer them, since expensing makes a company’s bottom line look less attractive. That would have a chilling effect on innovation and entrepreneurship, especially in the tech industry, because a large incentive would be stripped away.
Washington has not yet spoken on this issue, but there are two bills on the Hill – one passed by the House, the other holed up in the Senate Banking Committee – that opponents say are an effort to skirt FASB rules.
It’s critical that Congress and the president make the right decision on expensing stock options. In an age of exploding innovation, companies need the freedom to be innovative in the ways they compensate valuable employees.