The Trouble with Stock Options

from the the-power-of-options dept

The Economist is running an article questioning the value of stock options that companies use to motivate their employees. My biggest problem with stock options is that it makes people focus solely on the short term performance of the companies stock, and has very little long term incentives. This is what the country was complaining about in the early 90s when there was all this fear that the US was losing its leadership position. The problem was we had too short term a focus. What that turned into worked out well in creating fast products on the internet, but some sort of long term focus is definitely needed (and is lacking in many cases). Update/apology: I don’t post articles to techdirt that require you to pay to get in, and when this one was posted I could get in to the article just fine. I am not sure if that was just a fluke or something else, but since then I cannot get to the article again and I apologize for the link. I’m going to leave it up, however, as I think the topic is interesting. Update on the update: The article is now free for all again, so now you can click on it and go read it (supposedly) unless it’s just another fluke…

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Comments on “The Trouble with Stock Options”

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Vincent W. Yin says:

Stock option cost

The most worrying thing the article points out really ins’t short-term outlook IMHO, it’s that the options aren’t properly accounted for as costs and therefore make the profitability of the company look better (and hence the shares to rise).

A paraphrase from Warren Buffett:

If options aren’t compensation, what are they? If compensation isn’t an expense, what is it? If expenses aren’t counted towards earnings, where are they counted?

(from memory, so please excuse slight wording inaccuracy)

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