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For more honesty with stock options

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Earlier this month, corporate lobbyists worked overtime to kill bipartisan legislation that would require firms to treat stock options as any other business expense.

So what, you may be thinking. In fact, the ability of companies not to report these options – which grant an employee the right to purchase discounted company stock in the future – remains a critical defect in corporate governance. Congress still must fix the problem, to instill more honesty in how companies report the bottom line and to boost public confidence in Corporate America.

Under current rules, unexercised stock options do not have to be reported on a company's books, unlike wages and other expenses. Defenders of the status quo argue that the exemption encourages use of options. This is a good thing, they say, because options promote entrepreneurship, align executive decisions with shareholder interests, and spread the wealth by giving lower-level workers a share of the goodies.

These defenders claim that 10 million workers received options last year. That figure is overstated; the actual number is at most 3 million, or about 2 percent of US employees. But it's true that many blue-ribbon companies use options these days. Last year I conducted a survey of 150 companies listed on the New York Stock Exchange. Most of them (97 percent) offered stock options to employees. Not only in small start-ups but also in mainstream Corporate America, options are quite common.

However, the data also show that 62 percent of firms offering options pay them only to managers and then usually only to the upper crust. Only 4 percent of surveyed companies offered options to all employees.

So the case for exempting options from standard accounting rules cannot be made by asserting that options are a reliable way to share wealth with rank-and-file employees. The relevant question is whether options are a cost-effective mechanism for aligning executive behavior with shareholder interests.


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