Accounting for Stock Options   Part One Reasoning By Authority   Part Two Expense, Expense, and Expense   Part Three Why CEOs Fight Stock Option Accounting

Let's state the obvious fact: that CEOs are creating this hubbub over how to account for stock options has nothing to do with their concern about accounting theory. They don't care a wooden nickel about such matters. If they cared about accounting theory, CEOs would be more supportive of the Financial Accounting Standards Board (FASB), the Securities and Exchange Commission (SEC), and the International Accounting Standards Board (IASB) in developing and improving accounting practice. They don't want improvements in accounting, else somebody might actually know what they are up to.

If CEOs cared about investors, they would quit employing aggressive accounting techniques and they would quit biasing their estimates (whether of interest rates, asset lives, or fair values) to obtain their desired results. As they continue to utilize aggressive, almost fraudulent accounting, we can infer that they are looking out after themselves rather than anybody in the investment community.

If CEOs were worried about the state of accounting in the U.S., then we would expect them to learn the vocabulary, the concepts, and the principles of accounting to engage in meaningful debate. Mr. Hagopian and the set of signatories have not bothered themselves with the trifles of accounting, as seen in their invention of "gain-sharing instruments," their lack of appreciation for accrual accounting, and the misapplication of the entity concept.

If CEOs were really apprehensive about today's accounting, then we would expect them to get involved in the many less-than-stellar accounting rules and argue for a tightening and an improvement in them. Pension accounting and lease accounting and the accounting for business combinations, to name a few, are deficient FASB standards and in need of great work. Instead, CEOs get involved primarily to prevent FASB from doing too much damage to them.

So why does Kip Hagopian and so many CEOs still carp about the accounting for stock options? I posit it is because, first, they do not want the general public to understand the ever increasing gap between the wages of the average American worker and the average corporate CEO and, second, they do not want investors and creditors to realize the nexus between treasury stock repurchases and their personal bank accounts.

The average CEO in 2004 earned $11.8 million, while the average worker made only $27,460. The ratio of CEO-to-worker pay was 42 in 1980, 107 in 1990, and hit an all-time high of 525 in 2001. Even now the ratio is 431. The explosive growth in CEO compensation comes about primarily with stock and stock options.

Maybe as CNN's Lou Dobbs continues his criticism of exporting American jobs overseas to cheaper venues, he could advocate that we start outsourcing CEOs for cheaper ones. Or maybe he should just insist on receiving some value for the compensation. Broadcom's managers have received $5 billion from stock options while the business entity has lost $6 billion in operating profits. What have these executives done to deserve $5 billion in stock options?

I shall leave it to others to debate the issue of when CEO pay becomes excessive. At this time, I merely think people ought to have the facts so the debate will be meaningful. And saying that stock options are costless is, well, witless.

The second point is that we need to understand better the nexus between stock repurchases and CEO's personal bank accounts. Stock options line their bank accounts of managers with tons of money, but needing some emphasis is the fact that stock options are quite similar to the government's printing more money. When the government prints more money, the effect is inflation; for instance, it takes more money to buy the same goods. In like manner, when corporations print more stock certificates, the effect is also dilutive; for instance, an investor's shares in the company provides over time a claim to fewer and fewer of the net assets of the entity.

Corporate managers comprehend this inflationary aspect of stock options quite well, so they nearly always couple an aggressive stock option plan with a strategy to buy back shares with some hogwash like they want to put some cash in the hands of stockholders. If CEOs really wanted to do that, they could declare a dividend instead of playing this song-and-dance.

Cisco Systems has enriched its executives with $24 billion of stock options; it has counterbalanced the dilutive effect by repurchasing $19 billion of its own stock. Broadcom, Dell, and many other hi-tech companies have acted likewise.

Indeed, it is the nexus of the stock options and the stock repurchases that explains why stock options ought to be expensed. Managers find it critical to repurchase enough shares of stock to offset the inflationary ripples that stock options create. Simultaneously, the cash that the business enterprise disburses to replenish the lost shares represents the assets conveyed to compensate the management team.

While Kip Hagopian is entitled to his opinion, the standard setters at FASB, SEC, and IASB should not give it much weight. It is tainted with the greed of Lay and Kozlowski. It is mere rhetoric to justify incredibly exorbitant salaries.