Optional No Longer

The era of expense-free compensation is finally over. The Financial Accounting Standards Board's (FASB) decision to require stock option expensing ends a rather intense period of debate, accusation, and executive shirt-tearing.

I became a believer in option expensing earlier this year, although I'm not sold on the approved model. Alternate proposals, running the gamut from maintaining the status quo to marking the expenses to market each quarter, were slung against the wall. None stuck.

With support from heavyweights such as Berkshire Hathaway (NYSE: BRK.A  ) (NYSE: BRK.B  ) Chairman Warren Buffett, FASB stuck to its original proposal to treat options as a one-time expense at issue. It's a reasonable approach that won't cause wild swings in earnings, and since companies already do the calculation in the footnotes, there's nothing new. It might force investors to think about how much they're paying Oracle's (Nasdaq: ORCL  ) Larry Ellison, but is that really a bad thing?

Apparently, some people think it is bad. Resistance to expensing was fierce, spearheaded by such big-time executives as Intel's (Nasdaq: INTC  ) Craig Barrett and Cisco's (Nasdaq: CSCO  ) John Chambers, who were especially vocal in their opposition. This group argued, among other things, that expensing options will stifle innovation because companies will be forced to maintain earnings by offering fewer option incentives.

These are certainly legitimate, if exaggerated, concerns. It would be easier to maintain the status quo, and there is a real possibility that option grants to non-executives will shrink. And yes, earnings will be affected across the board, sparing few companies. However, this argument assumes investors are either too ignorant or too lazy to adjust reported earnings for option compensation costs already detailed in the footnotes. Plus, when it comes to the economic condition of a company, option expensing doesn't change anything -- it's just accounting.

Yet, as the great philosopher Yogi Berra once said, "It ain't over 'til it's over." Unable to sway the accounting watchdog, industry took its fight to Congress. The House of Representatives passed a bill requiring companies to expense only options given to the top five executives, which led Warren Buffett to write a scathing rebuke of Congress. This ridiculously inconsistent proposal treats equivalent transactions in two radically different ways, violating the spirit of accounting transparency.

The Senate version of this silliness has 25 co-sponsors but looks dead in the water, thankfully. Having Congress make decisions on accounting rules not only threatens the legitimacy of an independent accounting board; it's also loaded with too much irony to be taken seriously.

Fool contributorChris Mallonowns none of the companies mentioned in this article.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 534475, ~/Articles/ArticleHandler.aspx, 10/26/2016 7:51:23 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,199.33 30.06 0.17%
S&P 500 2,139.43 -3.73 -0.17%
NASD 5,250.27 -33.13 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/26/2016 4:00 PM
CSCO $30.55 Up +0.21 +0.69%
Cisco Systems CAPS Rating: ****
INTC $34.92 Down -0.18 -0.51%
Intel CAPS Rating: ****
ORCL $38.31 Down -0.05 -0.13%
Oracle CAPS Rating: ****