Stock options, the real cause of our budgetary woes?

[Joe]

Registration, don't bother

Wages of Bad Accounting: Bosses Got Rich While Companies Borrowed

The stock market bubble might have been less severe. The wild swings in federal budget deficits might have been reduced. Companies would owe a lot less money. Less wealth would have been transferred from shareholders to managers, but then perhaps less paper wealth would have been created. Richard A. Grasso might still be running the New York Stock Exchange.

All that might have happened if American politicians, a decade ago, had not forced the Financial Accounting Standards Board to back down from its proposal to force companies to record as a compensation expense the value of stock options given to employees.

''You manage what you measure,'' as they say, and the fact that no one had to measure options values helped lead to an explosion in their issuance after 1994. Employees knew they could be valuable, and so did bosses. Most shareholders either did not care or accepted the argument that reporting the expenses would depress share prices and thus be bad for them.

The options boom made many executives amazingly rich, and led to a lot of envy from those who were missing out. Did that help to reduce ethical standards in auditing firms, or among lawyers and investment bankers working on corporate deals? That cannot be proved.

But the options wealth for bosses of traded companies provided an excuse for Mr. Grasso to collect extra bonuses at the exchange, to compensate him for not receiving options. Then he got pension benefits on those bonuses, which provided him with the bulk of the $139.5 million payout that led to his ouster.

The companies that issued options worried about the one place all those options did show up in their financial statements: as dilution on the balance sheet. So, many companies borrowed money to repurchase shares.

The government was another beneficiary. Executives paid ordinary income tax when they cashed in the bonuses, and that led to a surge in government tax receipts that was little understood at the time. The budget bean counters assumed that those taxes were offset by reduced corporate taxes, because companies got deductions for the option profits, and so did not affect the deficit. But a lot of the profits came on options from unprofitable companies.

That helped to produce the Clinton budget surpluses, and the bursting of the bubble meant that most of the forecasted surpluses were going to vanish anyway, even before the Bush administration cut taxes.

Now the accounting standards board is trying again, and this time it will probably succeed, although there is no guarantee. Some companies are pushing a ''compromise'' that would deduct the expense - at ridiculously low values - of only those options given to top executives. There is no logical reason options given to one employee would be an expense while those given to another would not. But the hope is that politicians will be able to claim they are voting for little-guy recipients, not greedy corporate bosses.

Most shareholders understand that option compensation is an expense just like any other. Over the anguished opposition of managements, they are voting this spring at annual meetings for the expensing of options. That should sway votes in Washington.

Some lessons are hard to learn, however. Some European banks are petrified over having to disclose how much money they are actually making, or losing, on their derivatives portfolios. They have tried, with some success in the media, to turn a fight over rules of the International Accounting Standards Board into an argument about Anglo-American cultural imperialism, rather than about good accounting. The European Commission may block the rules.

It has been said that Europe is 10 years behind America. That would, perhaps, be one way to prove it.

This is an interesting theory, one I hadn't even thought of. Thoughts?

[Patrick Degan]

Actually, it seems to have a lot more to do with ridiculous tax-cuts combined with drunken-sailor spending. The usual budgetary irresponsibility which seems to have become GOP doctrine of late.

[Durandal]

Even if this was one of the major factors which helped produce Clinton's surpluses, it's not like Bush doesn't have the same factor backing him up. Companies still offer stock options.

[Joe]

Even if this was one of the major factors which helped produce Clinton's surpluses, it's not like Bush doesn't have the same factor backing him up. Companies still offer stock options.

The stock options boom is over, though, and a lot of the bad companies that offered the options in the 90s are gone now.

[TrailerParkJawa]

I'm sure it is no surprise to anyone that options are a hot topic here in Silicon Valley. Options are partially responsible for the insane appreciation in housing prices, but over all I don't think nixing options would have softened the blow of the bad economy.

Things were just to overhyped and the late 90's carried a momentem of their own. I never made any money on options, in fact I think under most cases options are fool's gold. In exchange for poor benefits and lower salary you are given a chance a riches. At least this is for the average employee.

The article is right that options can make upper management very rich. The big companies do not want to expense them because it will reduce their earnings.

I think the reduction in capital gains being collected on stock sales has done more to hurt the economy than options alone.

- my disjointed 2 cents.

[Darth Wong]

At the other end of the spectrum, defined-benefit pension plans are also a huge budgetary killer. Governments invariably hand out these defined-benefit pension plans (where the payouts are fixed, regardless of the pension fund's ability to pay or the real value of the pensioner's career contributions) which make absolutely no fiscal sense whatsoever.

It's only when you look at the defined-benefit pension plan in a private corporation that you see how excessive it is. In the case of struggling Air Canada (a private corporation despite the name which suggests nationalization), the total assets of the company are worth approximately $7 billion. Its employee pension: $9 billion. That's right; Air Canada's pension is bigger than the entire company. And the employees honestly don't seem to understand why a prospective buyer would want to nix the defined-benefits pension plan before he agrees to bail out the company from Chapter 11.

In a government, of course, this sort of thing is simply swept under the carpet. There is no problem paying for defined-benefit pension plans, because they can simply raise taxes. After all, it's not their money; it's only yours.

[Durandal]

Take this with a grain of salt, but we actually just did a problem in my statistics class dealing with this exact issue: do technology companies offer stock options more often than normal ones? We came to the conclusion that they did not.

[Joe]

Noncompensatory stock options, the ones that normal employees get, basically just allow employees to have part of their salary deducted to buy company stock at a discount. You aren't allowed to hold on to them long enough to make serious money like top management is. Not that that's necessarily a bad deal, it's just that labeling them as stock options is kind of misleading.

The article is right that options can make upper management very rich. The big companies do not want to expense them because it will reduce their earnings.

Well yeah, that's a huge reason, but there's also the fact that the things are impossible to expense accurately, which is why the powers that be have been more willing to allow companies to not expense them. If there was a good way to expense them they would have been required to be expensed like normal when they were first introduced by Congress and they probably never would have become as popular as they got to be during the dotcom boom.

[Joe]

Take this with a grain of salt, but we actually just did a problem in my statistics class dealing with this exact issue: do technology companies offer stock options more often than normal ones? We came to the conclusion that they did not.

In 1999-2000 stock options made up on average 87 percent of the compensation given to 100 dotcom CEOs, and around 58 percent of the compensation given to the CEOs of the top 200 companies in America. The former number has probably shrunk considerably over the last couple of years, but young tech companies are certainly more prone to compensating their executives with stock options than established companies.