NCPA - National Center for Policy Analysis

The Problem With Expensing Stock Options

September 11, 2002

Stock options are offered to chief executive officers and employees as a tool to align the interests of executives and investors. The current controversy surrounding stock options is whether or not companies should include options as an expense for accounting and tax purposes at the time that they are issued.

  • Supporters of expensing stock options argue that although it would decrease earnings per share and therefore the value of the stock, expensing would provide a more accurate picture of the stock's value.
  • However, since the earnings from an option are in the future, there is no way to determine the exact value of the option at the date that it will be exercised.

An employee's ordinary income is coming out of somebody's pocket. Therefore, that somebody is able to deduct that amount from their own taxes. Options are not coming out of anyone's pocket at the time that they are issued, so they should not be included in income taxes or deductions until they are exercised.

Some economists say that greater disclosure will address the legitimate concern of executives highly compensated with stock options, while expensing would discourage corporations from offering options to more employees.

Source: James V. DeLong, "The Stock Options Controversy and the New Economy," June 2002, Competitive Enterprise Institute, 1001 Connecticut Avenue, N.W., Suite 1250, Washington, D.C. 20036, (202) 331-1010.


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