I’ve been waiting for an Austrian who actually understands the accounting legalities to explain all this but no one has, so consider this an invitation. Tech companies have been buffeted by a round of stock options scandals. The media coverage has been a bit confusing but the irregularities have something to do with backdating stock options to a point when the stock price was low to maximize the value of the options. (What is confusing is that this in itself doesn’t seem to be illegal. The problems have to do with “proper disclosure”).
These stock options problems have hit top tech companies hard. The CEOs of McAfee and CNet have resigned. The former CFO of Apple is also gone (and some seem to want CEO Steve Jobs to step down which Apple shareholders definitely don’t want). “The stock option practices of at least 135 companies are under government investigation or internal review.”
Here are some reasons (from this article) that I’m suspicious that this rash of problems has less to do with an outbreak of unethical behavior in Silicon Valley and probably more to do with some political witch hunt:
- “A federal government task force looking for evidence of stock option malfeasance is now based in San Francisco.”
- “Companies that cooperate with the government and take steps to clean up their books have the best chance of avoiding legal trouble, said Eumi Choi, a federal prosecutor who is chairing the task force.”
- “…the stock option-induced departures of [CNet SEO] Bonnie and [McAfee CEO] Samenuk ‘are like red meat for prosecutors and regulators,’ Koenig said.”
Famed sci-fi writer and longtime tech columnist Jerry Pournelle had this to say on the recent This Week in Tech (TWiT) podcast: “Notice who benefits out of all of this. The bloody government. [These companies are] paying fines. The purpose of the government is to collect money and spend it on government employees. That’s what it does.”
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If you grant the options with the proviso that, on the date of exercise, the grantee will pay $x for the stock which is the lowest value in the year of granting, then, no, this is not illegal. The compensation committee could, if the bylaws of the corporation allow it, grant a cost to the grantee of $0 per share if it wishes. What appears to have happened is that the options were granted for one price, but subsequently changed without disclosure so that the net profit for the grantee was raised. I don’t know about you, but that sounds like a fraud committed on the shareholders.
However, there is certainly a witchhunt quality to the media coverage.
My reading of the iddue was somewhat different from the above poster.
From what I understand, public companies have 30 days to disclose that they have issued options. Many of these companies were merely looking back on the last 30 days to find when the option price was the cheapest, and declaring that that is when the option was written. This is not illegal, but it must be reported in the company financials that this is what is going on.
It is easy for regulators to spot this action because they would notice that the options were always written on the lostest price.
Investors should care about this because (now I am assuming) that companie would go to the market to buy options to cover their risks. If they go to the market after the option price has appreciated, then they will have additional costs.
What is going on here isn’t that companies are granting their CEOs options where they’re given the right to exercise at the lowest price-point over the past year. These path-dependent options (actually warrants) would have a higher price, thus cost, to the company that would have to be booked.
My finance professor, Gregg Jarrel, was telling us about this. The situation is that it was expected that companies grant options to executive that aren’t in the money at the date of option-granting, so that they don’t have to report an expense, and get a tax-benefit. However, when you actually look at what happens, you see that a large number of companies are granting options at exactly the lowest price-point during the year — not just before good news for the company that granted an uptick.
This is statistically extremely improbable, given the number of days in the year. And we’re not just talking about one year, but year after year. So what happens is that the BOD grants an executive an option at the end of the year, that is granted with the exercise price typically at the stock price (thus the option is not in the money). Whatever the stock-price is that day, so too is the exercise price for the warrant. However, boards hadn’t been bothering to put a grant-date on the warrant, so executive put one on there for them: at the lowest price point. Either the boards were in on this, or were incompetent.
This is a clear case of fraud and abuse of fiduciary duty. However, the actual cash-flow (or ownership-dilution) effects are very minor. We’re talking about pennies in the bucket. However, of course, for the CEOs, it’s millions of dollars.
Yet, despite that, when the market hears of this, stock-prices completely tank. 10, 15% losses, despite the very marginal actual cash-flow or ownership-dilution effect. The reason for this is that investors completely lose faith in the company and management, figuring that if they’re doing this, they must be doing other things as well.
Of course, this should be a civil issue between management and shareholders. It is understandable that Apple shareholders certainly wouldn’t want Jobs to resign.
Carl Marks,
I would agree that your understanding is better than mine. The fraud arises when the rules for the corporation’s granting of options are violated to benefit the grantee.
Carl,
Companies do not go to the market to purchase these options. As someone above pointed out they are really more akin to warrants and are written by the company itself. There is no cash cost to the company writing an option. Existing shareholders will be diluted if the option is exercised and stock is issued to cover that exercise.
The issue here is really one that should be resolved between shareholders and management. The reason the government is involved is because they treat investors, like every citizen, as if they were children. In every case I’ve looked at the options and their prices were disclosed to shareholders – usually in a footnote to the financial statements. If shareholders were too lazy to read the quarterly and annual report to discover this information, well shame on them. Furthermore, the easiest remedy is to just sell the stock if you don’t like the way options are granted. But of course the government believes that this “problem” is one that should be solved through coercion like every other “problem” they address.
The more interesting question about stock options involves the “expensing” of said options. If you think option dating was manipulated, wait until you see how earnings are maniupulated using option pricing, about as inexact a science as can be found in the financial world. Furthermore, since the options have no cash cost and existing shareholders will be diluted on exercise, the exercise of options will result in the double counting of the “expense”. And what if the options aren’t exercised? Since there is no dilution, the company will have listed a cost that didn’t exist. Will they recapture that sometime in the future?
Joe,
There is no question that what’s going on in these stock-option scandals is fraud. Executives are granted the options at the end-of-the-year, with an exercise price set equal to the stock price at the date of the option-grant.
What they then did, is went back and looked at a graph of the stock-price, and found the date of the lowest stock-price during the year. They then back-dated the granting of the option to that date, thus gaining more than they actually should have (that is, stealing from shareholders). I don’t see how this isn’t a very clear case of fraud.
What exactly should happen to these CEO should depend on what the shareholder’s want — clearly Apple’s shareholders don’t want Jobs to resign — but it’s clear that it is a case of fraud.
I agree with your arguments on why options shouldn’t be expensed, although I think that footnotes should be made of them. Any valuation of a company ought to assume that all outstanding warrants that can be exercised are immediately for conservative purposes. However, I doubt the required expensing of warrants actually significantly affects the company’s valuation by the market. What is relevant here is cash-flows, and real dilution, not non-cash expenses.
David,
Sorry, but no. You’ve been taken in by the press’s spin.
As Holman Jenkins pointed out in one of his WSJ op-eds, ever since the Joseph Noceras of the world have been spending the last four years trying to make the phrase “stock option” sound like the worst thing since Goody Summers shaved her old black cat, many companies (such as Microsoft and Google) have been moving away from issuing options at all.
Instead, they pay with something called “restricted stock.” Restricted stock is essentially an option backdated to zero.
By choosing an option grant date which is not 4004 BC and is not two minutes ago, but is at some point between these dates, you can effectively tune the structure of the risk-reward payoff you’re offering an employee. It would be much simpler to just let the company set a price, rather than a date, but since the forms effectively haven’t been updated since FDR decided that a “public company” was a contradiction in terms without a three-letter agency, there isn’t really a box for that.
I assure you that HR departments and compensation committees in Silicon Valley are not populated by evil, hook-nosed gnomes who spend their days trying to think up new ways to cheat their shareholders. Okay, one or two might be, but not hundreds. They just got a little bit sloppy on their government forms, which they had no idea Cotton Mather would be inspecting his own personal self.
Note that none of these complaints are, in fact, coming from shareholders. Who if they don’t like the way a company is managed or how it massages its numbers, tend to just sell it. The instigators of this frenzy of terror, namely academics and journalists, are, in general, neither investors, nor money managers, nor people who have ever worked in a company that, like, made stuff. Just the folks who should be scrutinizing accounting and compensation policies, don’t you think? Next up, I instruct Farmer Bob on how he can properly grow our new cubical tomatoes.
This is an interesting dialogue, which I am glad to see here at the Mises.org site. I’ve had discussions on the subject to varying degrees with colleagues & friends; there are two separate, but related issues here as I see it, some of which have been touched upon in earlier posts.
1. Potentially fraudulent “back-dating” of options.
2. Misappropriation of shareholder funds & misleading investment information due to shoddy & illogical accounting of options.
To the first point is somewhat specific in nature, and as David Heinrich pointed out above, the correlation between assigned options and corresponding lowest-price point of the year is statistically improbable. Perhaps once, but certainly not repeatedly and certainly not consistently across many unrelated companies. Each instance should be investigated/dealt with individually, but it’s difficult not to develop an inclination towards fraud when considering the circumstances.
The second point, is more broad in its application and as a result, perhaps more important – the issue of expensing for options. As usual, Warren Buffett has an ability to succinctly capture the essence of the problem here when he said:
“If options aren’t a form of compensation, what are they? And if compensation isn’t an expense, what is it? And if expenses shouldn’t go into the calculation of earnings, where in the world should they go?”
There has been massive amounts of earnings “manipulation” over the last several years as a result of options granted and their subsequent accounting treatment. To Buffett’s point, which I happen to agree with, there has to be some expense associated with an option granted – there is no such law of nature or finance that confirms nothing = something.
There must be a cost (expense) to the company in granting an option to the employee. What should the cost be? Logically one might simply assume the market closing price the day the option was granted.
As someone noted above, companies like Microsoft have moved away from their former options practice and towards more of a Buffett-based model. Indeed, Gates & Buffett are great friends and it has been acknowledged that Buffett’s influence over Gates in this area of options has been profound in recent years. Buffett’s turn of phrase above is the only rational, ethical way to consider options. By the way, neither he nor Charlie Munger carry any options through Berkshire Hathaway.
As Joe mentioned previously, caveat emptor to the would-be investors; especially individual investors. Every shareholder has an obligation to educate themselves on the accounting practices of the companies they own. However, I would suggest that today there are more $ per capital invested today than ever before in securities through individual accounts, IRA’s, 401(k)’s, pension funds, etc…massive amounts of $ flowing seemlessly on a weekly, bi-weekly, monthly basis. In many, if not most, cases, I would conjecture that the average Joe or Mary have no idea what their money is actually invested in, let alone understand the issue we are discussing. In addition, our government (and other entities) have been encouraging individual savings account to replace social security – which is a topic requiring a completely separate discussion – be in essence it would lead to, at least in the short-run, more and more ignorant (not necessarily unintelligent) individuals investing money without understanding how their money is being employed by companies using it and certainly not understanding the cause-effect relationship of something like unexpensed stock options. The point of this last bit of rambling is this – the government is keen to the topic because of the quantity of citizenry engaged in marketable securities investment. Right or wrong, they are in the debate & will be for the foreseeable future.
Perhaps the best way to relieve Govt. of their proclivity towards involvement would be for business leaders (Executives & Boards of Directors) to follow Buffett’s guidance and expense options in a clear and rational manner, or dispense of them entirely in the current form.
You do not need to expense options-you just need clear disclosure of the options and the shares repurchased. Profits per share will reflect the dilution effect of newly issued shares.
The proposals for immediate expensing are simply asinine. As one commenter above noted, sometimes options are worthless and adjustments will have to be made to past earnings on an ongoing basis.
Ryan D.,
I can understand Buffet’s point at some sense, perhaps for accounting purposes. However, ultimately, the Enterprise Value and Equity Value of a corporation is determined by its cash-flows. Non-cash events are only relevant in-so-far as they imply a cash-event at some point in the future. E.g., “depreciation rates” as used in accounting statements are irrelevant; what’s relevant is how fast something actually depreciates, thus the reduction of it’s productivity (cash-flows generated by it), and the requirement for an earlier replacement of it (a capital expenditure).
The ultimate valuation of a company is based on discounted cash flows, the “DCF” approach; in some cases — e.g., biotech companies — this may be too simple, because they have real options as to projects, and thus you’d need to use some kind of binomial options model combined with DCF. However, the point is, what’s relevant is cash-flows.
Executive warrant grants do not affect corporate cash-flows directly. They are not an “expense”. Assuming no market-signalling or affect on seasoned equity-offerings, they have no impact on cash-flows what-so-ever, thus do not affect Enterprise Value or Equity Value. All that they do is alter the distribution of the wealth represented by Equity Value (that is, equity value as valued by the market; not equity value as represented by accounting book value).
The only possible cash-flow effect is because of market-signalling and seasoned equity offerings. However, even despite this, I dont’ think stock-warrant grants should be expensed. This is only a possible effect, and occurs possibly at some point in the future. The effect of it should be captured when the corporation does a seasoned equity offering; or by the market’s revaluation of the companie’s equity value.
That said, I’m not entirely convinced that the required expensing of warrant-grants does much to the market’s valuation of corporate equity. It doesn’t affect cash-flows, thus intelligent investors will look beyond it, and only deal with the dilution issues. Then again, maybe there are many investors out there who don’t understand this, and maybe I’m relying a little too much on the stock-market being weak-form efficient to a certain extent, in that people only consider cash-flows.
David,
I read what you are saying, but…
What is the purpose of an option?
It is a form of compensating someone at some defined point in the future work work performed between when the option is granted and the future date. To suggest that there is no expense associated with the option, but that at some point in the future there is value (monetary value) associated and drawn-down from the option is illogical.
A similiar example may be illustrated using a young teen and the promise of an automobile at 16. To the child one might say, “you are now 14, if you do X between today and the date you become 16, then you will receive an automobile Y.” To the recipient there may be no associated cost, but their sure is to me the provider – there is a cash-flow expense. To take the example a step further and add say a Banker who may admonish me for taking a loan to purchase a car for a 16yo, but who ultimately provides the funding, the Banker is making a value judgement on my credit worthiness to repay the loan.
Likewise, an investor must make a value judgement on the methodology for how a company offering marketable securities accounts for their revenues and expenses, including the expensing (or lack thereof) for stock options. To assert that according to only cash-flow is important in a world making decisions is a bit naive. Billions of dollars a day are being passed around in a frenzy without giving due consideration to the accounting utilized to support a thousand individual per-share stock prices. Buffett’s questions are logical and irrefutable.
To provide forms of compensation at some point in the future without ever incurring a cost to provide such compensation is simply unreasonable. Simply because it doesn’t have a line item in your cash-flow statement doesn’t provide a free pass. There is a reason that we have four (4) important, related financial documents to describe the activies of a going concern: balance sheet, income statement, cash-flow statement, and statement of shareholder’s equity. The four must be effectively utilized in conjunction with one another to make truly informed decisions, in my humble opinion.
Regardless of whatever your professor is telling you, I strongly suggest that you follow Buffett’s guidance on this matter…afterall, he’s only the worlds greatest known investor, the second richest man who got to that level soley by making informed investment decision and who, oh-by-the-way, has influenced the thinking of the world’s richest man to the point that his company has begun to discontinue the practice of issuing stock options.
I thought I might present a provide a resource link that speaks to both camps – The No-expense Crowd & Buffett’s Compensation-has-a-cost Crowd – providing sort of a middle ground on the issue of options expensing.
http://www.gsb.stanford.edu/news/research/compensation_stockoptions.shtml
Although 2 years old, anyone who stays current with business has realized that the very companies referenced therein have been migrating towards expensing for stock options & Buffett’s view point. Personally, I find the Chicken Little assertions by the Silicon Valley crowd suggesting that stock options (and particularly unexpensed stock options) are a necessary form of compensation that if thwarted would lead directly to the inevitable demise of human creativity and willingness to perform a defined quantity of work for a defined quantity of compensation. Unexpensed stock options that at some future point in time have real monetary value are like reaping the nutritional benefits of crops that were never planted…they just appeared for your benefit.
One more and that is it…the point can’t be made any more clearly…
http://www.superiorinvestor.net/trading-options/expensing-stock-options.html
Ryan,
Of course options are a cost to the company.
The reason not to add them to your payroll number is not that they don’t represent a cost. It’s that you are adding apples to oranges – or, to be more precise, you are adding numbers to fudge factors. There is too much of this already in accounting, and the world doesn’t need more.
Unlike options sold on the market, options issued to employees cannot be precisely valued, because their exercise conditions are related to a variable the employee controls – his or her continued employment. Of course you can come up with any number of estimates, but they are just that. Fudge factors.
There is a second problem which is more subtle. This is that the structure of outstanding options affects the value of a company in a way that cannot be precisely defined in monetary terms. A substantial body of outstanding long-term options will slow the company’s price appreciation potential on the upside, but not affect it on the downside. The impact of this on investors is not quantifiable – unlike, for example, the company’s cash position, it cannot be translated directly into a discount on the share price. Unless, again, you use models that make unwarranted assumptions, such as the assumption that future volatility can be expected to mirror past volatility.
When you produce an accounting statement that combines precise numbers with fudge factors, you are doing anything but a service to the “little guy” retail investor. In fact, every time you make balance sheets more complex and less meaningful, you are giving an advantage to sophisticated investors who can reverse-engineer the transformation and read the actual numbers.
As for the “Chicken Little” crowd, I work in Silicon Valley, and perhaps I can speak to that. I think creativity is a lot lower than it was 10 years ago, and most of what’s left is concentrated in startup companies which are not, so far, subject to these bizarre religious campaigns.
In fact, startup companies are an excellent illustration of the role that options play in motivating employees. Startup companies are serving the interests of shareholders almost by definition – their VCs typically have them by the balls. If options were a device for management to screw shareholders, we would see them rarely if ever used in startups. Instead, they are issued in scads.
As for the decline in options, there’s no question that this has occurred. Primarily not out of any legitimate business need, but simply in order to escape the academic-journalistic-accounting jihad that you seem so intent on promoting. The same combination of corrupt interests is responsible for the fact that options are almost nonexistent in Europe, including Britain. I’ve seen a couple of acquisitions of UK companies where all the Silicon Valley employees felt that the Brit rank and file had gotten royally screwed.
May I ask, Ryan: what is your personal interest in this matter? Have you ever worked in or been a significant shareholder of a company that issued options? If not, what is the source of your expertise?
Mencius,
I am an academically trained industrial & systems engineer, minored in business. In graduate school I developed some market modeling using neural networks. That parlayed into a job with an investment bank & currently I am individual investor.
My issue with the way that options have been accounted for is a “consistency” issue. As has been noted in the earlier posts – there is cash & accrual accounting. The merits of each could be debated at great length, which is not the purpose. But to answer your question, my issue with expensing of stock options for employee compensation is one of consistency. It is abusive to suggest that stock option compensation is a special issue, too complex & requiring assumptions, therefore it should be excluded from being reflected as a cost. In accrual accounting, on which Wall Street functions, there are all kinds of assumptions baked into those statements, which do influence and affect the individual stock prices that wiggle up and down daily. As identified through numerous sources in the last few years (and reflected in the link provided by me to the Stanford U. website) many of the most recognizable names in industry are moving towards a procedure of including stock option compensation expense on their books. Meanwhile, the Intel’s of the world continue to thumb their nose at this approach. The issue very much is consistency…without consistency in how revenues and expenses are treated (even generally) then our accounting system loses credibility. Stock options are utilized as compensation, and compensation is an expense, and it should be baked into the financial statements a company publishes for investors, shareholders and the public to review.
What is also interesting to note is the “incentive” argument; as if a college graduated computer scientist or software engineer would have chosen unemployment when faced with the prospect of a job opportunity that did not include stock option compensation. To turn such a notion on its head, one need not go any further than Charlie Munger’s observations on the Psychology of Human Misjudgment to realize there are multiple factors influencing the misguided decision to not expense stock options as compensation. For anyone interested you can read Munger’s insights here:
http://www.loschmanagement.com/Berkshire%20Hathaway/Charlie%20munger/The%20Psychology%20of%20Human%20Misjudgement.htm
To assume that avoiding the expensing of stock option compensation has minor impact on the financial portrait of any business is naive. It is misleading at best. We’ve seen through the tech bubble bursting (and I have friends that experienced it from the inside), there were companies – many issuing stock option compensation in an effort to pay you later for work done today, which on a grand scale allowed the companies management to dress up the pig to be taken public, much sooner that in prior decades would have been acceptable. Of course, Wall Street has to shoulder some responsibility for that as well, but my point is that in earlier times, a company would have to reflect profitability for a period of 3 to 5 years, against rather fundamental but reasonable evaluation of the businesses revenues and expenses before they could be package for an IPO. The utilization of stock option compensation has allowed companies – some which have prospered & others that have not – to promise, at not current cost payment for current services at some later point in time. It seems reasonable (as outlined by the Stanford business professor) that stock option compensation could be reflected (and updated) on a quarterly basis in quarterly financial statements to reflect the anticipated expense of future costs in the current landscape. This effort of pulling future anticipated costs to a current time is little different than recognizing revenue in a current time when the firm may not receive it in total for months or years to come.
Anyway, obviously this is an issue that will be resolved in the future, hopefully sooner than later.
Ownership of public companies is incredibly diffuse. The average “investor” is somebody w/ a 401(k) plan under every incentive to pool his money with thousands of others in an equity fund to try and preserve their purchasing power. The fund managers themselves are integrated with company management and via their own employers looking to provide services to these same companies. (On another note, I am often astonished to see how young and thinly qualified many of these managers are, given that they are fiduciaries for other people’s millions of dollars.) Publicly owned companies exploit this situation to the hilt, and gratuitously issue stock options to their senior executives. In this context, government regulation rather than investor self-help is what you are going to get.
Mencius:
Do you think you’re joking about “cubical tomatoes?” Actually, it’s been many years since there was developed (at Cal Davis, in concert with Hunt) a variety of “plum” tomato which, although not cubical, is roughly square in section, thus lending to easier mechanized picking. The variety has other attributes in the same vein: it’s got tougher walls and a field planted on a given day will virtually all ripen for picking on the same “due date.”
Ryan,
Thanks for your comments. I promise to be slightly less hostile now that I know you’re an engineer, rather than an academic!
You are absolutely right that my objection is to the entire system of accounting as practiced on Wall Street today. Hopefully on mises.org we need not restrict ourselves to the status quo. If we can reject fractional-reserve banking, we can reject anything. And I do, in fact, believe that this entire universe of “mark-to-model” accounting serves mainly to obscure financial reality. Call me old-fashioned, but I think the best way for a company to demonstrate that it’s profitable is for it to pay, um, dividends.
Obviously, if I don’t believe in Wall Street accounting, it follows that I should believe that any attempt to increase its credibility, especially one accompanied by such a moralistic media campaign, is counterproductive.
What I especially object to in your tone is the implicit assumption that anyone who disagrees with you is motivated strictly by venal concerns. This attitude is unfortunately common in today’s intellectual sphere, especially in the press. It is never productive, and you seem far too perceptive to indulge in it.
As someone who has worked in quite a few Silicon Valley software companies, both public and startup, I have seen all the phenomena you describe. I have seen stock options used to extract ridiculous amounts of money from unsophisticated investors. I have also seen them used to extract ridiculous amounts of work from unsophisticated engineers. In fact, I personally have been on both sides of this game.
Again, as an investment banker, you must be aware of the importance of options as compensation in startups, and you must also be aware of the complete domination that VCs have over managers in the typical startup situation. I urge you to consider the combination of these facts again.
I will not belabor my point about mark-to-model. But modeling options is even worse than most mark-to-model practices, because it conceals an important qualitative property. That is, it completely hides the effect of options on investors, which is to cost them money if and only if the stock goes up. This feedback effect is entirely absent in, for example, complex revenue-recognition problems.
In other words, option expensing is not like other kinds of compensation, or even other kinds of expenses, because it tends to hide rather than reveal the true profitability of the company. Instead it merges this profitability number with spurious information that is a consequence of the stock’s price history. The result is a bizarre mishmash of feedback that takes significant effort for the uninitiated to untangle.
For example, at one company where I used to work, my coworkers who had been hired a couple of years before me were effectively being paid like NBA stars. (I was being paid like an NBA benchwarmer, which still wasn’t bad, I must say.) If you had taken my coworkers’ tax returns and used the IRS’s accounting methods to define their compensation expenses – as, for example, the New York Times almost always does – the company would have looked like a massive cash-burner which should be liquidated ASAP.
In fact, the actual business of this company was quite profitable, although in, say, 2000, its stock was insanely overvalued. The stock went down by a factor of 10, but the company is still doing fine. Here is the difference: if my coworkers had really been NBA stars, their option swag would have been a genuine, market-rate salary, which presumably would have meant that the company could not hire other engineers who were just as good at a tenth the cost.
Of course this was not true. These guys saw the appreciation of their options as no different from anything else in their portfolios. They owned the options, which they’d been given for work in the past at a time when they had much lower value, and the options went up. All this had very little to do with their salaries, except for IRS purposes. Certainly if anyone had told them that since they were making 500K a month off of options, their salaries could be omitted as a rounding error, they would have flipped.
So when the stock went back down, instead of demanding that their “compensation” be converted to salary form, these engineers for the most part continued to work for normal salaries. Or they retired and were replaced by others who did. In other words, reality reflected salary accounting and not option expensing. If the actual market price of these peoples’ services had been the NBA star rate, the company would and should have failed and been liquidated.
I hope this helps you understand why, both as an investor and as someone who works in the Valley, I don’t believe the expensing jihad contributes to economic productivity.
(And btw, I love Buffett and Munger to death, but they are in an entirely different line of work. I would accept Buffett’s opinion on, say, reinsurance, without hesitation. But there is a reason Buffett doesn’t do tech, which is that he doesn’t know the business, and he has never been shy at all about stating this very directly.)
But given all this, the Stanford proposal does seem like the best of a bad bunch. Certainly recognition based on vesting rather than grants is an essential part of any attempt to model the system. Again, though, I believe the effort is fundamentally quixotic and counterproductive, and favors sophisticated investors (such as yourself) over less sophisticated ones. It would certainly not be the first government policy to exhibit such an inversion of intention and result.
Gene,
I did think I was joking, but I obviously should have checked the facts! Thanks for filling me in.
BTW, I hope you didn’t miss my vacation-delayed response over at GNXP. (Now we just have to find a way to explain HBD to the mises.org audience…)
Gene,
I did think I was joking, but I obviously should have checked the facts! Thanks for filling me in.
BTW, I hope you didn’t miss my vacation-delayed response over at GNXP. (Now we just have to find a way to explain HBD to the mises.org audience…)
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